The State of the Global Hedge Fund Industry – KPMG/AIMA Reports


According to a study released in April 2012 by The Centre for Hedge Fund Research at Imperial College in London, hedge funds have performed much better than other asset classes such as equities, bonds, and commodities over the past 17 years.

The research was commissioned by the Alternative Investment Management Association (AIMA) and the international audit, tax, and advisory firm KPMG, and is the most in-depth study into the hedge fund industry that has yet been carried out.

Hedge Funds Outperforming Traditional Investments

The report, which is called “The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy” found that hedge funds returned an average of 9.07% per year after fees between the years of 1994 and 2011. This compares favourably with the figures for global equities (7.18%), global bonds (6.25%) and global commodities (7.27%).

Even more impressively, these returns were achieved with a lot less in the way of risk volatility, in terms of Value-at-Risk (VaR) than stocks or commodities. In fact, the Value-at-Risk and volatility were comparable to that of bonds, which have long been considered the least risky and volatile asset class.

The study also showed that hedge funds are major generators of “alpha” –  a measure of the return in excess of the compensation for the risk – with an average of 4.19% per annum between 1994 and 2011.

The Centre for Hedge Fund Research demonstrated that portfolios containing hedge funds significantly outperformed those that comprised only bonds and equities, using a conventional portfolio invested 60% in stocks and 40% in bonds as an example. The portfolio with a hedge fund also had a much higher Sharpe ratio, a measure of how much an asset returns in relation to the risk taken, and demonstrated lower “tail risk”, which is the risk of extreme fluctuation.

In order to carry out the study, the Centre for Hedge Fund Research has created a unique aggregate hedge fund and benchmark index database, which represents a thorough aggregation of the latest information from a variety of leading sources regarding the performance of hedge funds on a global basis. Because both active and inactive funds were included, survivorship bias is not an issue.

Broader Benefits

Also highlighted in the report are the positive contributions made by the hedge funds industry to the economy as a whole, serving as important liquidity providers, helping to allocate capital more efficiently, increase financial stability, and diversify portfolios.

A second report by the same authors called “The Evolution of an Industry”, released in May 2012 showed that the mass influx of institutional money into hedge funds in the wake of the 2008 financial crisis has forced the industry to up its game in terms of transparency to investors and operational sophistication.

More Transparency, More Compliance Pressures

Based on a survey of 150 hedge fund management firms with over $550 billion in total under management, the report makes use of in-depth interviews to ascertain important information about the hedge fund industry. According to the report, hedge fund management firms have invested heavily in areas such as regulatory compliance and investor transparency in the post-crisis years. 76% of those surveyed reported an increase in investment from pension funds since 2008, and institutional investors – including funds of funds – accounted for 57% of all assets under management at hedge funds.

This increase in institutional investment has increased the demands from investors for transparency and due diligence, with 90% of those surveyed saying they had experienced this. 84% of respondents said that they had increased their transparency levels since 2008, and the majority of firms have taken on several new members of staff in order to accommodate these demands. Across the board, investment in compliance had increased since 2008, with 98% of those surveyed hiring extra legal staff in order to cope with this demand.

About the report:

Published by AIMA – the global hedge fund association, the Alternative Investment Management Association (AIMA) has over 1,300 corporate members (with over 6,000 individual contacts) worldwide, based in over 40 countries. And by KPMG – the global network of professional firms providing Audit, Tax and Advisory services. KPMG operates in 152 countries and have 145,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

You can download the report here “The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy”. The document Size is 3799 KB.