Hedge Funds Outperform During Recessions

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The US economy is either in recession or at risk of slipping into a one. During recessionary periods, it's much better to hold hedge funds than it is to have a traditional 60/40 mix. It's times like these when active management is critical to generating strong returns.

Below we examined portfolio drawdowns and returns in the 3 most recent recessions and this recent period. The first table shows the maximum drawdown for our Hedge Fund Composite Gross of Fees Index, an all equity portfolio, an all bonds portfolio, and a traditional portfolio composed of 60% equity and 40% bonds. Drawdowns for the hedge fund index are smaller than those of the 60/40 portfolio during each of the recessions. The value of adding alternatives to a traditional portfolio is apparent.


Asset Class Returns Since Jan '22


The drawdowns suggest that an allocation to alternatives is advantageous during recessions. This is also true if we zoom out to look at a broader time around the recession as well.

The table below shows the annualized returns for the same portfolios as above in the years around recession periods. Hedge funds show their complementary benefit. Annualized returns of hedge funds so far have shown a modest decline relative to the sizable moves in stocks and bonds. If anything the diversification benefit of hedge funds is more significant this period as bonds have not provided nearly the offsetting benefit as they have in previous recessions to the typical 60/40 portfolio.


Most investors don't have access to these types of returns and those that do have to pay handsomely for the returns to the point that much of the alpha benefit is eroded. At Unlimited, we are using our return replication technology to develop low-cost index products that will provide access to these returns for all investors at a fraction of the cost. The goal is to help investors build much more robust portfolios particularly during these recession periods.


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.