Evaluating hedge fund performance in the decade since the GFC

Comparing the performance of a diversified hedge fund portfolio to public equity over the last decade has led some investors to question the role of their portfolios. After all, hedge funds are expensive, potentially illiquid and lack transparency. A few large, prominent and publicly visible (by law) institutional investors have made the decision to entirely redeem from hedge funds in recent years, as highlighted by industry press.

What should investors think about diversified hedge fund portfolio performance? More important, going forward, does an allocation to diversified hedge funds continue to be worthwhile? This evaluation first seeks to level-set performance expectations for diversified hedge fund portfolios using a holistic risk/return objective framework and then provides guidance to determine the role of hedge funds going forward. In the evaluation, three key points will become apparent:

  1. Fees matter…a lot. In fact, fee structure is make-or-break in terms of success.
  2. The time period matters. While the last five years have been challenging for hedge fund performance, the prior five years saw results that were above expectations.
  3. Hedge funds can, and do, play an important role of downside management with upside participation, but you need the latter to justify the former.
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