Hedge funds have significantly outperformed the broader US equity index over the last five years… but only an elite cohort of managers claimed the win, according to a long-running report on the sector.
The 2023 BarclayHedge survey of the top 50 hedge funds – now in its 20th edition – found the high-performing managers returned an annualised 12.5 per cent over the five years to the end of 2022 versus 9.43 per cent for the S&P 500 total return.
However, the wider hedge fund universe ended the five-year period well below the US stock index with an average annual return of just 3.4 per cent.
Eric Uhlfelder, who has compiled the Global Investment Report since inception, says in the 2023 study that the top 50 hedge funds clocked up the above-index returns by “being minimally correlated to the S&P 500”.
The 50 best-performing hedge funds recorded a correlation of just 0.18 to the US equities benchmark compared to an “average hedge fund correlation of 0.91”.
But those genuinely uncorrelated hedge funds, with an average age of 14 years, have achieved an annualised return of 12.4 per cent since inception at a lower volatility that the US shares index.
Diversified commodities and global macro strategies headed the five-year top 50 performance tables as both returned above 20 per cent on average each year while credit, merger arbitrage and convertible arbitrage approaches lagged the S&P 500 over the period.
Uhlfelder says the long-term record of the top 50 managers “tells us that when looking beyond the short term, proven, well-established hedge funds earn their keep by delivering steady absolute returns during good times and excelling when markets turn south—regardless of strategy”.
Uncorrelation tends to count against hedge funds during bull markets, though, as the first half of 2023 has proven. The BarclayHedge report notes that the S&P 500 rose some 14 per cent during the 12 months to June 30.
And the top 50 managers fell behind the surging equity market in the first quarter of 2023 in a performance gap expected to widen once the June-end figures arrive.
“Consistently performing hedge funds cannot keep pace with a bull market. That’s been the takeaway from my 20 years of tracking hedge funds,” Uhlfelder says. “… But as the historical data reported in this survey reveals, market selloffs – not market rallies – are what fuel the medium- to longer-term outperformance of the most consistently performing funds.”
About half of the funds in the BarclayHedge top 50 study reported assets under management of less than US$1 billion while only a few of the “uber” firms in the sector made the grade including Citadel, D E Shaw, Millennium and Drawbridge.
Larger ‘name’ hedge fund managers tend to keep clients even during periods of underperformance, according to the report.
“Past performance doesn’t assure anything,” Uhlfelder says. “But long-term consistency can be a pretty good indicator of an effective and repeatable investment process. And when that process has delivered attractive gains regardless of what the market is doing, than maybe that’s something worth looking for.”