Statistics published by Mellon Analytical Solutions (MAS) today show that pooled fund of hedge funds achieved positive results in the first quarter of 2007, with a median return of 3.4%. The median return over the last 12 months was 7.4%, which represents a real rate of return of 2.6% against retail price inflation.
Over three years to 31 March 2007, pooled fund of hedge funds achieved a positive median return of 8.3% p.a. However, they were outperformed significantly by pooled UK Equity funds, which returned 17.2% p.a. over the same period. According to MAS’ latest statistics, this outperformance of 8.9% was achieved with a slightly higher level of risk to that of pooled fund of hedge funds. The median standard deviation, which measures the volatility of returns, was 6.5% p.a. for pooled UK Equity funds, compared with 5.3% p.a. for fund of hedge funds.
Comparative results were more favourable over the last five years, with fund of hedge funds returning 9.1% p.a., against 8.4% p.a. for UK Equity funds. In addition the median standard deviation for pooled UK Equity funds was much higher over this period at 14.5% p.a. compared with 4.9% p.a. for fund of hedge funds.
Daniel Hall, Publications and Statistics Manager at Mellon Analytical Solutions, said: “Over the last five years pension funds have shown an increasing interest in alternative strategies, such as fund of hedge funds, as a means of generating return, while reducing overall fund risk through diversification. At the end of 2001, pension fund weightings in alternatives stood at 0.2% of total asset value, whereas by the end of 2006 this had increased to 2.2%.”
Each quarter, MAS publishes results from its pooled fund of hedge funds universe. This universe consists of multi-strategy funds of hedge funds which offer a route into alternative investments for UK pension schemes. Hedge fund strategies can be broadly classified as directional, event driven and non-directional. Directional strategies seek to forecast and exploit broad market trends, while event driven strategies seek to anticipate and exploit events such as mergers or corporate restructurings. Non-directional strategies generally seek to take advantage of pricing inefficiencies.
As at 31 March 2007, the average fund of hedge funds held 43.1% of its assets in directional strategies, 14.7% in event driven strategies, 15.2% in non-directional strategies and 27.0% in other (unspecified) strategies and cash.
Mellon Analytical Solutions’ fund of hedge funds universe currently covers 18 separate funds with over £3.5 billion in assets. All returns quoted are net of fees.