Over the past thirty years, hedge funds have proven an uncanny ability to avoid significant down-side risk in equities. By looking at the cumulative drawdown of hedge funds gross-of-fees, we can see that hedge funds have avoided some nasty corrections. Most notably, hedge funds drew-down some -5% through the dot-com bubble while the broader S&P 500 index dropped some -45% from its peak. Subsequently, hedge funds successfully navigated the financial crisis and the recent tumult in markets. While the S&P 500 was down more than -20% during 2022, hedge fund strategies only sold off by about -5%.
The results depicted are aggregated results, are not indicative of future results, and do not represent returns that an investor attained.
The data suggest that this drawdown protection is driven by hedge funds’ aggregate exposure to equity risk. Across funds, there may be substantial differences in market views and about which financial assets to hold for the prevailing environment, but, on average, the data show that hedge funds have successfully managed their equity exposures against economic turmoil. Here we can see that average hedge fund beta to equities (proxied with the S&P 500) has varied over time and that decreases in equity risk have roughly preempted sell-offs in equity markets. Notably, hedge fund managers have dialed back their equity exposure significantly since 2021. With a current equity beta of 0.2, hedge funds are about as bearish on stocks now as they ever have been.
The results depicted are aggregated results, are not indicative of future results, and do not represent returns that an investor attained.
Through the end of July, the S&P 500 is up nearly 20% YTD. Meanwhile, hedge funds have returned mid single digits. But the data make a strong case for hedge fund strategies over time. While the bias of hedge funds towards capital preservation looks less attractive during short periods of strong bull markets, the data show that this prudent risk management has effectively generated returns while mitigating losses over the long-haul.
For informational and educational purposes only and should not be construed as investment advice. The historical analysis discussed herein has been selected solely to provide information on the development of the research and investment process and style of Unlimited. The historical analysis should not be construed as an indicator of the future performance of any investment vehicle that Unlimited manages. No investment strategy or risk management technique can guarantee return or eliminate risk in any market environment. No Representation is being made that any investment will or is likely to achieve profits or losses similar to those shown herein.
