AIMA Releases Educational Guide to Understanding Hedge Fund Performance

The Alternative Investment Management Association ("AIMA") published a new educational guide titled "Apples and Apples: How to Better Understand Hedge Fund Performance."

The guide proposes five steps toward improving understanding of hedge fund performance:

• Look at risk-adjusted returns: The guide states that hedge funds consistently outperform U.S. equities (as measured by the S&P 500), global equities (MSCI World) and global bonds (Barclays Global Aggregate ex-USD Index) on a risk-adjusted basis.
• Look at long-term data: The guide says that short-term data, such as monthly comparisons, can be misleading and argues that greater clarity is gained by looking at long-term figures. It points out that hedge funds have outperformed the main standalone asset classes over the past 10 years ending with 2013 both in terms of "headline" returns and on a risk-adjusted basis.
• Look at the returns by strategy: The guide explains how hedge fund strategies are enormously diverse and have different characteristics that can play different roles in investor portfolios. It also stresses that hedge funds are not an asset class, and that there is no such thing as an "average" hedge fund.
• Compare with the most relevant asset class: The guide specifies that reference should be made as to how different strategies perform in relation to the most relevant asset class to that strategy. In other words, it may make much more sense to compare a particular strategy to bond performance rather than equities.
• Be aware of differences between hedge fund indices: The guide notes that, during the past five years ending with 2013, the main hedge fund indices produced materially different results, reflecting variations in constituency and methodology.