FTFM Hedge fund returns are as much as 8 per cent lower than previously thought, according to a senior academic.
Harry Kat, professor of risk management and director of alternative investment research at Cass Business School, at London's City University, said lack of information on hedge funds had created a misleading impression of returns.
“If you only look at live funds, you miss all the funds that have closed and you will overestimate returns,” Prof Kat told a hedge fund conference in London last week.
Whereas just 5 per cent of hedge funds closed in 1994, about 15 per cent would close this year, he said. Failure to look at closed funds overestimated returns by 2-4 per cent.
In addition, new hedge funds took 32 months on average to register on databases. This resulted in returns not including companies that had closed before they registered. Prof Kat said research from the Netherlands showed these omissions resulted in returns being overestimated by 3-4 per cent.
The two hidden factors combined meant overall returns were 6-8 per cent lower than generally realised.
Prof Kat also said investors were using the wrong tools to assess the place of hedge funds in a portfolio.
“People treat hedge funds as if they were stocks and bonds. Everyone is taught the same standard way and that's what we apply.”
He said the big difference was there was only 10 years of hedge fund data, and then only in the unusual environment of a strong bull market followed by a sharp downturn.
In addition, there were now 6,000 hedge funds compared with just 500 in 1990.
“We don't know what is normal for hedge funds. For stocks we have two centuries of data,” said Prof Kat.
“If I told you stocks went up 25 per cent yesterday you would know that's notnormal.”
He concluded that there were no tools available to accurately assess hedge funds and that asking the right questions was the only way to avoid poorly managed funds.
