Key Takeaways
- • A KPMG and Alternative Investment Management Association (AIMA) report claims hedge funds generated 9.07% average annual returns (1994–2011) versus 7.18% for stocks, 6.25% for bonds, and 7.27% for commodities, with an equal-weighted hedge fund index returning five times initial investment after fees over the period.
- • The report emphasizes hedge funds achieved superior risk-adjusted returns with lower volatility and Value-at-Risk (VaR) metrics compared to stocks and commodities, positioning them as meaningful diversifiers within mixed portfolios.
- • The primary source explicitly acknowledges that survivor bias significantly distorts widely reported hedge fund composite data, as underperforming funds frequently withhold results and data contributors often cease reporting when performance deteriorates.
- • The report's findings likely overstate actual hedge fund investor outcomes, failing to reflect real-world performance experienced by most institutional allocators given the structural limitations of available performance data.
Summary
A comprehensive two-part report published by KPMG and the Alternative Investment Management Association in April 2012 presents an exceptionally favorable case for hedge fund performance relative to traditional asset classes. The 32-page study, which received significant media coverage, documents that hedge funds averaged 9.07% annual returns after fees during the 1994–2011 period, outpacing stocks (7.18%), bonds (6.25%), and commodities (7.27%). The research also calculates that an equal-weighted hedge fund index multiplied initial capital by five times over this 17-year span following fee deductions.
Beyond absolute return metrics, the report emphasizes risk-adjusted performance advantages. Hedge fund volatility and Value-at-Risk profiles trailed both stocks and commodities substantially, while remaining comparable to bonds across both risk measures. The authors further argue that hedge funds generated meaningful alpha and provided diversification benefits even amid severe macroeconomic stress periods. Notably, the report contends that a balanced allocation across hedge funds, global equities, and fixed income outperformed the conventional 60/40 stocks-to-bonds portfolio on Sharpe ratio and tail-risk dimensions.
However, the primary source raises critical methodological concerns that temper confidence in these conclusions. The report itself acknowledges the pervasive influence of survivor bias within hedge fund performance databases. Poorly performing funds routinely decline to report results, while participating funds frequently terminate data submissions when returns deteriorate, creating a systematic upward bias in published composite indices. This structural limitation means the reported returns likely misrepresent the actual experience of institutional investors allocating capital to hedge funds during this period, as the data excludes the true performance trail of underperforming or defunct vehicles.
The tension between the report's optimistic headline conclusions and its embedded caveats about data quality creates ambiguity for institutional investors evaluating hedge fund allocations. While the KPMG-AIMA findings document superior nominal and risk-adjusted returns through 2011, the acknowledged survivor bias suggests actual investor outcomes—accounting for failed fund investments, delayed disclosures, and selection effects—likely diverge meaningfully from the reported benchmarks.
Beyond absolute return metrics, the report emphasizes risk-adjusted performance advantages. Hedge fund volatility and Value-at-Risk profiles trailed both stocks and commodities substantially, while remaining comparable to bonds across both risk measures. The authors further argue that hedge funds generated meaningful alpha and provided diversification benefits even amid severe macroeconomic stress periods. Notably, the report contends that a balanced allocation across hedge funds, global equities, and fixed income outperformed the conventional 60/40 stocks-to-bonds portfolio on Sharpe ratio and tail-risk dimensions.
However, the primary source raises critical methodological concerns that temper confidence in these conclusions. The report itself acknowledges the pervasive influence of survivor bias within hedge fund performance databases. Poorly performing funds routinely decline to report results, while participating funds frequently terminate data submissions when returns deteriorate, creating a systematic upward bias in published composite indices. This structural limitation means the reported returns likely misrepresent the actual experience of institutional investors allocating capital to hedge funds during this period, as the data excludes the true performance trail of underperforming or defunct vehicles.
The tension between the report's optimistic headline conclusions and its embedded caveats about data quality creates ambiguity for institutional investors evaluating hedge fund allocations. While the KPMG-AIMA findings document superior nominal and risk-adjusted returns through 2011, the acknowledged survivor bias suggests actual investor outcomes—accounting for failed fund investments, delayed disclosures, and selection effects—likely diverge meaningfully from the reported benchmarks.
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