Alternatives doing well

Hedge fund investors injected $38.2bn in the asset class in the first quarter of 2004, a record inflow that beats last year's fourth quarter's $26.8bn, according to a Tremont TASS research report issued recently.

Raphael Haas – from PSG Fund Managers says that this marks the fourth consecutive quarterly record for industry inflows, according to the research, which is based on managers representing approximately $642.4bn in assets.

For the third consecutive quarter, the strategies receiving the most inflows were equity-oriented strategies, with long-short equity receiving$8.2bn, event driven, receiving $6.9bn, and global macro, receiving $5.5bn.

As much as we continue to tout the benefits of hedge fund investing, these record inflows are still staggering, especially against the backdrop of geopolitical and economic uncertainty.

However, a brief glimpse below the surface explains these persistent inflows: It's the returns.

An examination of historical returns for hedge funds reveals that they have significantly outperformed traditional assets from 1990, when reliable data first became available.

Indeed, the average annual return for hedge funds from 1990 through the third quarter of 2003 was 13.2%.

This compares with 10.9% for stocks, 7.8% for bonds, and 4.7% for cash. This is true even if one takes a more conservative measure of hedge fund performance represented by a fund-of-funds (FOF) index, which shows an average annual hedge fund return of 11.2% annually.

Equally important is the fact that standard deviation (risk) of returns for the hedge funds is only 6.1% over the sample and 5.5% for the FOF Index. This compares to 15.1% for stocks and 4.4% for bonds.

Therefore, hedge fund performance is even more attractive on a relative basis, where the composite hedge fund Sharpe ratio is 1.39 versus .41 for stocks and .70 for bonds.

This supports the often-heard contention that hedge funds have stock-like returns with bond-like risk.