Long and Short of It: Hedge Funds Show Strong Risk-Adjusted Performance

With the days of near-zero volatility and low interest rates behind us, equities’ bull run is over. Amid present market conditions, hedge funds are delivering the uncorrelated, risk-adjusted returns that many investors expect. According to Maples Group data, that is exactly what is happening.

The Maples Group conducted a review of its hedge fund administration clients for a three-year period ending first-quarter 2023. Each of the funds in the sample set (n=97) had at least US$100 million in assets under management. Among the biggest takeaways: investor cash flows into hedge funds during that time were net positive, even despite overall investor outflows in 2022. Moreover, the composite return of the hedge funds delivered double-digit annualised returns for the three-year period with less than half the volatility of equities (based on the MSCI ACWI index) and provided higher absolute and risk-adjusted returns during the volatile period of 2022. The hedge fund strategies that saw the most significant inflows during the three-year period were debt and credit strategies as well as equity long-short and special situations.

FUND FLOWS: THREE YEARS ENDING Q1 2023

There have been net positive investor cash flows into our sample of hedge funds over the past three years—even withstanding investor outflows in 2022.

Contributing factors include:

• The onset of the COVID-19 pandemic —  and the subsequent March 2020 market swoon —  later showed to be an inflection point for active fund management and a return to tactical strategies.
• Debt and credit strategies have seen the largest net investor inflows over the period for a variety of reasons, including higher interest rates.
• Special situations fund, particularly those focused on distressed assets, benefited from investment inflows because of newfound volatility, as did equity long-short funds.
• Long-short strategies’ propensity for risk rebalancing beckoned more inflows.
• Fund of Funds saw cash inflows from various investor types, including retail investors seeking exposure to hedge funds.
• Although actively managed funds did see a slight outflow in 2022, overall investor interest in uncorrelated strategies drove net inflows for multi-strategy funds.
• Q1 2023 has seen a return to net positive fund flows for hedge funds.

HEDGE FUND RISK-ADJUSTED RETURNS: THREE YEARS ENDING Q1 2023

The above chart illustrates the returns and volatility of various hedge fund strategies relative to global equity markets. Some key findings:

• Hedge funds have provided stronger risk adjusted returns over the past three years despite a historically strong market for equities.
• Debt and credit strategies provided the highest risk-adjusted returns. Equity long-short and multi-strategy funds have provided strong absolute performance returns, with a firm showing vis-à-vis the MSCI ACWI index, but with reduced risk.
• During the volatility of 2020, hedge funds significantly outperformed equity markets on a risk-adjusted basis, with most strategies returning more than 10% (net of fees) on an absolute basis.
• While equity markets neared all-time highs in 2021, hedge funds continued to provide an alternative source of returns with equity long-short and multi-strategy excelling in particular.
• Perhaps the most telling was the data set from 2022. As equities had their worst year since 2008, hedge funds outperformed equities on an absolute and risk-adjusted return basis.
• Reflecting on data from the start of 2023, hedge funds are continuing on their strong performance across a number of strategies, particularly multi-strategy funds.

SHORT TERM EXPECTATIONS FOR HEDGE FUND STRATEGIES

Amid this climate of interest rate hikes, inflation and potential recessionary pressures, multiples matter. Profit margins and growth expectations matter even more. The present market is one in which active management will thrive. The pinnacle of active management is hedge funds, which can generate returns for investors from their deep understanding of specific companies, markets and opportunities.

APPENDIX

Fund Flows: 2020

Fund Flows: 2021

Fund Flows: 2022

Fund Flows: Q1 2023

Hedge Fund Risk Adjusted Returns – 2020

Hedge Fund Risk Adjusted Returns – 2021

Hedge Fund Risk Adjusted Returns – 2022

Hedge Fund Risk Adjusted Returns – Q1 2023