PER 2015
the Federal Reserve coordinated a private bailout with 16 different investment banks involved. The combination of a herd mentality and operating at high leverage means hedge funds still have an element of systemic risk today. However when judging the quality of an investment, it is not solely annualised return that should be noted. Alpha is an important measure also, and hedge funds tend to beat index trackers in this category because they are actively risk managed. A large proportion of hedge fund investors are pension and sovereign wealth funds, who prioritise secure returns over impressive short term performance. A paper by the Alternative Investment Management Association, entitled ‘Apples and Apples’, attempted to contrast hedge fund performance with the most relevant asset classes. For example, they compared fund managers using equity long/short strategies with the S&P 500 and fixed income traders with the bond market. In the ten year period from January 2003 to January 2013, hedge funds outperformed bond indices, property investment, commodities and equities in terms of cumulative returns. In conclusion, it is clear that hedge funds still have a place in the financial industry. Whether they deserve current salaries is an altogether more difficult question to answer.
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