Key Takeaways
- • A KPMG and AIMA 32-page report found hedge funds generated average annual returns of 9.07% (1994–2011) after fees, outperforming stocks (7.18%), bonds (6.25%), and commodities (7.27%), with an equal-weighted hedge fund index returning five times the initial investment over the period.
- • The report claimed hedge funds achieved superior risk-adjusted performance with considerably lower volatility and Value-at-Risk than stocks and commodities, while promoting diversification benefits and alpha generation even during macroeconomic stress.
- • The primary source explicitly notes the data likely overstates actual hedge fund success and does not reflect investor experience, as the report itself acknowledges survivor bias significantly influences widely disseminated composite hedge fund performance data.
- • Poorly performing hedge funds frequently fail to disclose results, and funds stop reporting when performance deteriorates, creating a structural bias in the composite indices used to support outperformance claims.
Summary
A major report published jointly by KPMG and the Alternative Investment Management Association (AIMA) generated widespread positive coverage this week by presenting compelling evidence that hedge funds substantially outperformed traditional asset classes over a 17-year period. The 32-page study, identified as part one of a two-part analysis, documented that hedge funds delivered an average annual return of 9.07% after fees from 1994 through 2011, compared to 7.18% for stocks, 6.25% for bonds, and 7.27% for commodities. Under an equal-weighted allocation strategy, the hedge fund index multiplied the initial investment by five times over the same timeframe.
Beyond raw return comparisons, the report emphasized that hedge funds achieved these results while maintaining considerably lower volatility and Value-at-Risk metrics than stocks and commodities, with risk metrics approaching bond levels. The analysis further argued that a blended portfolio incorporating hedge funds, global stocks, and bonds outperformed the conventional 60/40 equity-bond allocation with a significantly higher Sharpe ratio and reduced tail risk. The report concluded that hedge funds generate "economically important, risk-adjusted performance" and provide meaningful diversification benefits even during severe macroeconomic environments.
However, the primary source raises critical methodological concerns about the report's conclusions. Despite the positive headline findings, the analysis acknowledges that the data likely inflates actual hedge fund performance and does not accurately reflect how most investors have fared in the sector. A fundamental issue undermining the analysis is survivor bias embedded in composite hedge fund indices. Poorly performing funds frequently do not disclose their results, and funds that participate in survey-based reporting typically cease providing data once performance deteriorates. This systematic omission of underperforming funds creates a structural upward bias in the aggregate performance metrics, suggesting actual investor returns may be materially lower than the reported figures indicate. Institutional investors should weigh these findings against the acknowledged limitations in the underlying data before drawing conclusions about hedge fund value proposition relative to traditional allocations.
Beyond raw return comparisons, the report emphasized that hedge funds achieved these results while maintaining considerably lower volatility and Value-at-Risk metrics than stocks and commodities, with risk metrics approaching bond levels. The analysis further argued that a blended portfolio incorporating hedge funds, global stocks, and bonds outperformed the conventional 60/40 equity-bond allocation with a significantly higher Sharpe ratio and reduced tail risk. The report concluded that hedge funds generate "economically important, risk-adjusted performance" and provide meaningful diversification benefits even during severe macroeconomic environments.
However, the primary source raises critical methodological concerns about the report's conclusions. Despite the positive headline findings, the analysis acknowledges that the data likely inflates actual hedge fund performance and does not accurately reflect how most investors have fared in the sector. A fundamental issue undermining the analysis is survivor bias embedded in composite hedge fund indices. Poorly performing funds frequently do not disclose their results, and funds that participate in survey-based reporting typically cease providing data once performance deteriorates. This systematic omission of underperforming funds creates a structural upward bias in the aggregate performance metrics, suggesting actual investor returns may be materially lower than the reported figures indicate. Institutional investors should weigh these findings against the acknowledged limitations in the underlying data before drawing conclusions about hedge fund value proposition relative to traditional allocations.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.