Friday, June 26, 2020

What hedge fund return expectations should we expect for the next 10 years?

How have hedge funds performed when you look at 10 years periods? The answer may surprise you. This certainty raises some big questions on whether these investments have the same benefits touted earlier.

Hedge funds showed strong performance for the 1990's when the market was much slower; however, these absolute returns have not been seen for the last 10 or 20 years. Hedge funds, as measured by the HFR indices have shown only modest annual returns for the last decade. The relative performance versus an equity benchmark has switched to negative levels. Correlations have also risen over this period except for the HFRI Macro Index which has significant variation through time. (Source: Janus Henderson "A Case for Multi Strategy") 

What can investors expect over the next decade? This is one of the key questions for any asset allocator. Will hedge funds look like the 90's or the last decade? Can hedge funds create alpha to keep up with market exposure? Given the competition and size of the hedge fund markets, the likely bet is that returns will stay close to 20 year averages. Of course, expected returns for markets betas are also supposed to  be low, so the best guess is similar absolute return and better relative returns. This is not a pretty forecast if pension discount rates are still expected to stay around seven percent.

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