Hedge funds out-performed equities and bonds on a risk-adjusted basis in 2016, producing net gains for their investors worth around $120 billion, according to the Alternative Investment Management Association (AIMA), the global representative of alternative investment managers, and data provider Preqin.

Hedge funds’ risk-adjusted return, as measured by the Sharpe ratio, was 1.45 for the year, ahead of the S&P 500 (1.1), MSCI World (0.68) and Barclays Global Aggregate (0.20) indices, according to AIMA and Preqin. [1]

The analysis, based on a database of more than 3,000 funds, found that hedge funds also outperformed stocks and bonds on a risk-adjusted basis over three years and five years. Risk-adjusted outperformance is highly valued by institutional investors such as pension funds since it reflects volatility as well as net returns.

On an absolute basis, hedge funds returned 7.4% last year, according to the Preqin All-Strategies Hedge Fund index. [2]

At the same time, AIMA and Preqin estimated that the net gain in the value of hedge fund assets in 2016 represented $120 billion. That would be the value of investment profits net of all fees, were investors to withdraw their investments and crystallise those gains.

The research also addressed the performance of hedge funds that are open to outside investors and those that are closed to investors. On a five-year annualised basis, closed funds returned 6.42% per annum on average, while open funds earned 6.75% per annum on average.

AIMA Chief Executive Jack Inglis said: “We already know from the various indices such as Preqin that have reported their flash numbers this month that 2016 was one of the better years for hedge funds since the financial crisis. Even though the headline numbers may not have met all investors’ expectations, our analysis highlights the importance of explaining various strategies and timeframes for yielding returns to clients. Significantly, on average hedge funds outperform on the key metric of risk-adjusted returns over one year, three years and five years.”

Jack Inglis added: “All told, the value of hedge fund portfolios managed by pension funds and other investors grew by some $120bn last year – further evidence of the benefits that hedge funds can bring to investor portfolios.”

Amy Bensted, Head of Hedge Fund Products, Preqin, added: “2016 could be characterised as a year of a series of unpredicted events. As markets responded to the unexpected events of 2016 hedge funds were able to show their worth and generate their best returns for three years. Investors, however, are looking for hedge funds to produce more than high returns; as this study shows hedge funds have delivered solid risk-adjusted returns over the short and longer terms, a facet of hedge funds that is highly prized among the institutional investors that Preqin works with.”

Notes to editors

1. The risk adjusted return as measured by the Sharpe ratio is calculated by subtracting the risk-free rate (typically the return on US treasury securities) from the fund or index performance (returns, net of fees) and dividing this by the fund or index’s volatility. The higher the ratio, the better the risk-adjusted return.

Risk-adjusted returns (Sharpe Ratio) Hedge Funds S&P 500 Total Return MSCI World US Dollar Total Return Barclays Global Aggregate
1 Year 1.45 1.10 0.68 0.20
3 Year 0.97 0.74 0.31 – 0.23
5 Year 1.49 1.29 0.87 – 0.23

For media enquiries, please contact:

AIMA –
Kaveri Niththyananthan, AIMA
T: +44 (0)20 7822 8380
E: kniththyananthan@aima.org

Dominic Tonner, AIMA
T: +44 20 7822 8380
E: dtonner@aima.org

Preqin –
William Clarke, Preqin
T: +44 (0)20 3207 0265
E: william.clarke@preqin.com

About AIMA
AIMA, the Alternative Investment Management Association, is the global representative of the alternative investment industry, with more than 1,800 corporate members in over 50 countries. AIMA’s manager members collectively manage more than $1.8 trillion in assets. AIMA draws upon the expertise and diversity of its membership to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes and sound practice guides. AIMA liaises with the media in order to better inform stakeholders about the industry. AIMA is committed to developing skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – first and only specialised educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors). For further information, please visit AIMA’s website, www.aima.org.

About Preqin
Preqin is the leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. Preqin has built a reputation in the alternative assets industry for providing the most comprehensive and extensive information possible. Leading alternative assets professionals from around the world rely on Preqin’s services daily, and its data and statistics are regularly quoted by the financial press. For more information, please visit: www.preqin.com.