Hedge Funds Outperform the Market? Two Conflicting StudiesVW Staff
Hedge funds have continued gaining popularity today, and especially among investors with a high net worth, because it is believed that the returns gotten on investment are high. On the other hand, there are people who have sworn off hedge funds, due to the risk that they portend for investment, and also due to their low performance. So, the question that people new to investment usually ask is whether they should go for hedge funds, or simply keep their distance.
A recent study on hedge funds showed that these funds have over the last seventeen years outperformed bonds, commodities, and equities. It was found that the funds returned around 9.07% annually, when compared to stocks that returned 7.18%. The funds also returned 7.27% for commodities, and 6.25% for bonds per year, and all this was achieved at a lowered volatility rate.
In fact, the study found that hedge funds were major generators of the ever hard to accomplish- alpha- and on average returned around 4.19%. Additionally, hedge funds also outperformed bonds and equities since they had a much higher Sharpe ratio. The ratio usually shows how the returns of a given asset, recoup the risk that an investor takes.
Therefore, the study shows that hedge funds ought to be the way to go for any person looking to ensure that returns on investments are great. Nonetheless, in this study, data was hard to attain, since most hedge funds do not like openly declaring their performance.
However, there are financial analysts who argue that hedge funds provide one of the best ways in which investors can loose their cash. This is because hedge funds do not only underperform against the three bond indexes, they also underperform in all stock classes, and they always do this while taking more risk. Therefore, if a fund went down, the possibility of investors recouping their cash would be hard; in fact the chances of the fund recovering would be near nil.
So, in the decision to invest in hedge funds or not, investors are usually faced with the question of whether hedge funds are overrated or misunderstood.
Financial analysts are of the opinion that people today do not invest in hedge funds because they understand the intricacies of these funds. Rather, they invest in them because they are the ultimate status symbol. This is because most hedge funds are dominated by investors with a high net worth; so new investors looking for class, and sophistication usually invest in these funds in order to fit in.