A Survey of Demographics and Performance in the Hedge Fund Industry
Authors: A. Bandopadhyaya and J.L. Grant
Source: The Journal of Investing
Date: Summer 2007
In their “Survey of Demographics and Performance in the Hedge Fund Industry,” authors Bandopadhyaya and Grant scrutinise hedge fund domiciles, hedge fund manager locations, and the risk-adjusted performance of these funds. Performance was calculated over the twelve years from 1994 to 2005. This period is of particular interest, as it is composed of a bullish (for the stock market) sub-period from 1994 to 1999, and a bearish sub-period from 1999 to 2005. It is thus possible to see how hedge funds fare in different market environments.
Hedge fund demographics are examined on the basis of the Alternative Asset Center database. As of January 31, 2006, it contains 1,410 hedge funds. The survey shows that hedge funds are domiciled in one of four regions: the USA, offshore (including the Cayman Islands, the British Virgin Islands, the Bahamas, and Bermuda), Ireland, and other (primarily France, Germany, and the United Kingdom). 54% of the funds are domiciled offshore, 22% in the USA, 21% in other, and 3% in Ireland. 69% of the offshore funds are domiciled in the Cayman Islands, 14% in the British Virgin Islands, 12% in Bermuda, and 4.7% in the Bahamas. More than 75% of the US-domiciled funds are based in the state of Delaware. The states that follow Delaware are California (5%), Florida and New York (4% each), and Illinois (3.5%).
52% of the funds, however, are managed in the USA. The authors do not provide details about hedge funds managed by non-US domiciled managers. 46% of US-domiciled managers are in New York; 15% are in California; Illinois, Connecticut and Florida account for about 6% each, and 4% are in Massachusetts. The other states account for less than 3%. Taken together, results on hedge fund domiciles and hedge fund manager locations show that a significant number of hedge funds are not managed in the country where they are domiciled.
Performance is measured on the basis of Credit Suisse/Tremont hedge fund indices. First, the performance of the whole hedge fund universe, represented by the Credit Suisse/Tremont Hedge Fund Index (henceforth HFI) is compared to the performance of traditional assets, represented by the S&P 500 Index, the MSCI World Index, and U.S. Treasury Bills (risk-free rate). Calculating annualised returns on the twelve-year period, HFI and S&P 500 display a comparable performance of about 10.5%. HFI greatly outperforms the MSCI World Index (8.4%) and U.S. Treasury Bills (3.8%). Considering risk, HFI displays an annualised standard deviation of 7.9%, while it is 14.8% for the S&P 500 Index, and about 14% for the MSCI World Index.
Results by strategy are reported. Annualised returns are calculated for the 10 Credit Suisse/Tremont strategy indices. It appears that three strategies outperform the global HFI: Global Macro with 13.5%, Long-Short Equity with 11.9%, and Event Driven with about 11.5%. Four strategies underperform the MSCI World Index: Dedicated Short with -2%, Emerging Markets with about 8.3%, and Fixed-Income Arbitrage and Managed Futures with 6.3%. Considering risk, except for Emerging Markets, all strategies display a lower annualised standard deviation than the S&P 500 and MSCI World indices. As a result, only three strategies reveal Sharpe ratios lower than those of the S&P 500 (0.45) and MSCI World (0.33) indices: Emerging Markets shows 0.28, Managed Futures 0.21, and Dedicated Short Bias -0.34. Equity Market Neutral and Multi-Strategy, on the contrary, post Sharpe ratios of 2.08 and 1.28. The authors provide no details on results during bull and bear markets. They make some observations instead: HFI underperforms the S&P 500 Index during the bull market, but it outperforms it during the bear market.