This short article shows that the largest hedge funds 1 have underperformed the world market index 2 (i.e. 50% US aggregate bond index + 50% MSCI World index 3) in 2020, whereas the largest mutual funds have outperformed the latter.
2020 saw a cascade of tumultuous events occurring across the planet affecting the markets negatively, from the ongoing US / China trade war and central banks flooding global markets with unprecedented levels of liquidity, to the arrival of Bitcoin as a noted yet still highly volatile store of wealth 4, all of which was topped off by the commercial uncertainty and unparalleled disruption to business brought about by the advent of the coronavirus pandemic. Global investor confidence was severely dented in many traditional sectors.
Nothing symbolises this tricky year for traditionally sound investments more than Ray Dalio’s celebrated Bridgewater and their Pure Alpha 12% Strategy fund, which went from posting a 0.29% return in 2019 to suffering a loss of -10.63% in 2020, wiping out their 2018 and 2019 returns. Furthermore 2020 also wiped out two years of returns on their Pure Alpha 18% Volatility Strategy, all in all forcing the coveted investment firm to lay off staff and fund managers, some of whom had close to two decades of employment with them 5.
PIMCO Income Composite posted an Annual Sharpe Ratio (Risk free Annual =0.50%) of 1.54 while Millennium International, Ltd hit 3.0, being the only two of the ten funds with Sharpe Ratios higher than 1.
It is generally accepted that the larger the AUM of a fund is, the closer it represents the index. At the upper limit, funds are so big they actually are the market index. Following this logic, the larger the fund is, the closer its return should be to the world market index.
However, Table 1 below shows the contrary for 2020, with these ten mutual and hedge funds surprisingly representing only 0.98% of the world equity index, which itself has a total AUM of $126 trillion. Furthermore, an equally weighted portfolio composed of the five largest mutual funds outperformed the World Index, whereas the five largest hedge funds underperformed it.
Cumulative Return of the 5 largest Hedge Funds & 5 largest Mutual Funds compared against the World Market Index
|Cumulative Return Jan20 – Nov20||% of world market index|
|5 largest hedge funds (average return)||0.01%||0.18% 6|
|5 largest mutual funds (average return)||14.90%||0.80%|
|50% BB Barclays Core US Aggregate Bond ETF 50% + 50% MSCI World ETF||10.13%||These two indices represent 93% 7 of the world market index|
|S&P 500 Index||12.10%|
Source: AlternativeSoft, HFR, Eurekahedge, Morningstar
To conclude, without any trace of statistical significance, this year it would have been much more prudent to invest in a portfolio of the five largest mutual funds or in the world market index (50% ETF MSCI, 50% BB Barclays) rather than the five largest hedge funds.
N.B. This article is not intended to provide any professional investment advice and should be treated as more of an opinion piece.
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2 The world market index is a massive index, valued at $126 trillion, composed of 45% of all equities on the planet, 48% of all bonds on the planet, 6% of all real estate, 2% of all commodities. Weights as of 2017. Source: Historical Returns of the Market Portfolio, Ronald Doeswijk, Trevin Lam, Laurens Swinkels, 2019.
4 During 2020 Grayscale Bitcoin Trust posted an annualized return of 96.14%, an annualized volatility of 179.38%, and a massive return of 166.96% but still notably underperformed Bitcoin as the underlying asset. Skybridge Capital filed with US regulators to launch their own BTC fund while Bitcoin itself hit the $20,000 mark.
6 Initial assumption that the five largest hedge funds & the five largest mutual funds would represent a much higher percentage of the world market index. These 10 funds represent a mere 0.98% of the world market index.
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