If an institutional investor were to purchase an asset-weighted basket of the 30 largest hedge funds reporting to eVestment, the data in this report quantifies the market exposures they would accept and the risks and expected returns and performance in stressed market environments, including actual historical stress tests. The report offers a unique and valuable perspective on performance and risks associated with the largest hedge funds in the world. Some key points of interest in the report, according to author Peter Laurelli, eVestment vice president of research, include:
- This hedge fund portfolio is significant and represents many of the industry’s largest funds. The portfolio of the 30 largest hedge funds reported $446 billion in assets to eVestment at the end of July 2014, representing 15% of the hedge fund industry’s $3.068 trillion in AUM. The average fund size in the portfolio is nearly $15 billion.
- The portfolio of the largest funds is expected to outperform the industry. Given the portfolio’s weightings and market exposures at the end of July, it is expected to produce a return of 0.81% in the following month, an annualized return of 10.2%.
- An investor purchasing a basket of the 30 largest hedge funds is accepting a bullish position on Asset-Backed Securities (ABS) markets, global corporate capital structure (via convertibles) and US equity markets, while accepting bearish positions on fixed-rate agency Mortgage-Backed Securities (MBS), AAA-rated US Commercial MBS (CMBS) and are positioned to benefit from a flattening yield curve.
- The portfolio is at greatest risk to shocks in fixed income markets. A negative shock of 3% to the portfolio’s ABS index factor is expected to result in the portfolio declining 4.5%.
- Compared to prior periods, the portfolio of the 30 largest hedge funds is at a much higher risk should historical market stresses similar to the financial crisis recur. If a scenario similar to the global financial crisis were to occur in the following month, the portfolio is expected to decline 12.4%, nearly 3x the decline the portfolio of the largest funds at the end of 2013 was expected to lose in the same historical stress test.