Hedge Fund Performance: 1990–1999

Using a large database, I studied hedge fund performance and risk during an almost 10-year period from 1990 to mid-1999. The empirical results show that hedge funds had an annual return of 14.2 percent in this period, compared with 18.8 percent for the S&P 500 Index. The S&P 500 is much more volatile, however, than hedge funds as a whole. Annual survivorship bias for hedge funds was 2.43 percent. I examined year 1998 in detail because hedge funds were heavily affected by the global financial market tumble in that year. For example, the highest volatility for hedge fund returns occurred in 1998, and more funds died and fewer were born in 1998 than in any other year of the period studied. Few funds changed their fee structures. In those that did, the fee changes were performance related; poor performers lowered their incentive fees. In the study reported here, I used a database containing more than 2,000 hedge funds to examine their performance during the period from January 1990 to July 1999. The empirical results show that hedge funds had an annual return of 14.2 percent in this time period, compared with 18.8 percent for the S&P 500 Index. The S&P 500 was much more volatile, however, than the group of hedge funds as a whole. The standard deviation of the hedge fund returns was 1.67 percent a month, whereas the standard deviation for the index was 3.89 percent a month.This study documented an annual survivorship bias of 2.43 percent for hedge funds from 1994 to 1999. That is, studies based on current funds will overstate fund performance by only 2.43 percent on an annual basis. Because data vendors started to collect data on defunct funds only in 1994, survivorship studies are meaningful only if their data begin after 1993.The article examines 1998 in detail because hedge funds were heavily affected by the global financial market tumble in that year; hedge fund returns in 1998 were the most volatile of the period. The loss in August when Russian debt defaulted reached 4.88 percent for the funds as a group. More funds died and fewer funds were born in 1998 than in any other year during the 10-year period.Few hedge funds change their fee structures; their management fees and incentive fees tend to be stable over time. For example, of the 2,016 funds studied here, only 12 funds changed management and/or incentive fees from 1997 to 1998. The fee changes were performance related; poorly performing funds lowered their incentive fees.