New York (HedgeCo.net) We have featured several articles about how the HedgeCoVest platform can be used to build a portfolio of hedge fund strategies, kind of like building your own fund of hedge funds. The benefits of building a fund of funds are the diversification in holdings and strategies as well as the usual benefits of hedge funds—strategies meant to protect your assets as well as grow them regardless of market conditions.
A recent report from eVestment showed an additional possible benefit and that is better performance. According to the July report, over the past year, funds of hedge funds have performed better than hedge funds themselves. The semi-annual report showed that the average fund of funds gained 6.65% from May 2014 through May 2015 while the average hedge fund gained 5.84%. These figures are on a global scale, but the same held true with U.S. focused funds as well. Just looking at domestic funds, FoHFs were up 5.65% during the period discussed while single manager funds were up 4.73%.
Not surprisingly, the top performing FoHFs were those focused on the Asia-Pacific region. Funds focused exclusively in the region gained an average of 14.77% year over year. The report showed an uptick in volatility for FoHFs, but it wasn’t as big as the increase in volatility experienced by single manager funds. For FoHFs volatility increased by 5.34% during the 12-month period and for single manager funds, the increase was 9.79%.
Despite the fact that FoHFs outperformed single manager funds over the past year, the single manager funds have still outperformed FoHFs over the past five years. The average 5-year return for single manager funds was 6.11% while the average FoHFs gained 4.14%. The standard deviation for single manager funds averaged 10.75% while the average standard deviation for FoHFs was 5.76%. If we use these numbers to calculate a Sharpe ratio to compare the rates of return on a risk adjusted basis, the Sharpe ratio for single manager funds is 0.382 which is only slightly better than the 0.372 for FoHFs.
If the performance numbers being quoted by eVestment are net of fees, the FoHFs are at a disadvantage due to the double layer of fees. However, because the HedgeCoVest platform charges one flat fee, that issue is irrelevant for our investors.
Rick Pendergraft
Research Analyst
HedgeCoVest
