1. HFs have met investors’ return expectations over the long term

Almost 55% of the investors surveyed indicated that they are looking for a premium of 300 – 400 basis points (bps) over the risk-free rate for their HF allocations. When looking at the annualised returns since 2000, the HF industry has consistently generated excess returns in the range of 3-4% above risk free rate, regardless of the market conditions.

However, outperformance across the various timeframes has seen considerable differences, shifting between alpha- and beta-driven returns.

For example, between 2000-2009 the MSCI World Index delivered annualised returns of -0.2% and the risk-free rate delivered 3.0%. However, the HF industry generated circa 6.4%, suggesting that most of the outperformance was alpha driven.

In the decade between 2010-2019, we observed interest rates of 1% or lower over most of the period, while the MSCI delivered an annualised return of 9.5%. HFs generated approximately 4% annualised returns, suggesting the 3.4% of outperformance was due to market beta.

Since 2020, markets have experienced two contrasting periods – starting with low rates during the COVID-19 crisis, which was followed by subsequent rate hikes to curb inflation. HFs have generated an annualised return of around 6.2% that represents an outperformance of almost 4.4% over the risk-free rate. As the MSCI delivered an annualised return of 9.5% in this timeframe, HFs’ excess returns were a combination of both alpha- and beta.