Funds Hub
Money managers under the microscope
Hedge funds vs mutual funds
By Dunny P. Moonesawmy, Head of Fund Research for Lipper in western Europe, Middle East and Africa. The views expressed are his own.
Hedge funds took some heat from the credit crisis as liquidity and transparency became critical factors in investment decision-making. It’s fair to say hedge funds continued to deliver decent returns to investors, but how do they compare to mutual funds if we focus on performance and risk alone?
In 2008, the average return for mutual funds stood at a negative 22.91 percent. At the same time, hedge funds posted average returns of minus 8.37 percent. We might have expected a stronger rebound for mutual funds in 2009 and 2010 than for hedge funds, yet the data shows better average returns for hedge funds in both years. Positive returns in the sector stood at 22.36 percent and 18.08 percent respectively against 21.16 percent and 10.23 percent for mutual funds.
If we look at performance over a longer time frame, mutual funds posted annualized returns of 2.07 percent over 3 years and 1.85 percent over 10 years while hedge funds recorded returns of 8.81 percent and 3.77 percent respectively.
We have a different story on the risk side. Part of the appeal of hedge funds is that they seek to actively manage volatility, but managers struggled to keep volatility under control during the credit crisis. The 3-year annualized standard deviation was higher than mutual funds (19.19 percent against 16.65 percent) and the 10-year figures showed similar results (16.80 percent against 12.44 percent).
If we go deeper into the data, we can note that volatility is strongly linked to the asset class for mutual funds while at the same time performance and volatility are positively correlated. As a simple example, a bond category will tend to have lower volatility and lower performance than an equity category. And likewise, an aggressive diversified fund will likely to have higher performance and volatility than a conservative diversified fund.
To view a graphic of the performance data, click on this link.
