Peering through the hedge

The Hedge Fund industry has grown dramatically in recent years and we provide some interesting findings about these heavily marketed funds.

The normal fee structure of such funds is 1.5% per annum management fee plus a 20% performance fee if the fund beats its benchmark.  i.e. the manager gets 20% of all returns above the funds target benchmark.

So given the questionable performance and eye wateringly high fees of hedge fund; do investors get their money’s worth?

A study of recent data that analysed 15 years hedge fund performance came to the following notable conclusions:

Despite their name; over 60% or the returns attributable to the “hedge” fund returns were in fact just the market rate of return (as you would get with an index tracker) and the overall returns were highly linked the ups and downs of the overall stock market.  Therefore the marketing of these funds as a solution to “hedge” your portfolio against the stock market and diversify may be flawed.  Proving this point, in 2008 hedge fund returns were down 20% – very much like the stock markets.

The data found that annual fees were actually around 3.4% per annum rather than the published 1.5% per annum when taking into account the “performance fee”; much higher than other types of fund.

The return over the 15 year study period of the average hedge fund was 7.7% after accounting for the poor returns from funds that have closed.

Therefore the effect of the average fees (3.4%) totally wipes out any manager added returns on the average fund (7.7%).  In other words the higher returns generated by the hedge funds is not enough to cover the additional fees they charge.