Earlier this year we wrote about the growing performance gap that has emerged between hedge funds and their alternative UCITS (“alt UCITS”) counterparts between 2013 and the end of 2021.
Alt UCITS are regulated funds which, due to incremental expansion of eligible assets over the years, have brought hedge fund-like investment strategies to non-institutional investors.
Hedge funds are largely unconstrained in their investment style and the instruments traded. Alt UCITS funds are subject to additional rules on fund terms, concentration, liquidity, portfolio transparency and instruments traded. They also tend to have lower fees than the “two and 20” seen in traditional hedge funds.
Considering the significant volatility in traditional assets and diverging hedge fund strategy performance so far this year, the below update gives further insight following on from our last piece.
LONG-TERM CUMULATIVE RETURNS OF HEDGE FUNDS V ALT UCITS
Source: Aurum Hedge Fund Data Engine
Both hedge funds and alt UCITS have experienced negative performance so far this year. As these are index-based returns (asset weighted), they represent average numbers which conceal significant dispersion at the strategy and underlying manager level in both hedge funds and alt UCITS. But we can clearly see that alt UCITS have significantly underperformed their hedge fund counterparts.
2022 CUMULATIVE RETURNS OF HEDGE FUNDS V ALT UCITS
When we look at the industry in aggregate both since 2013 and year-to-date, hedge funds have outperformed alt UCITS funds, however this is not consistent across all strategies.
PERFORMANCE – JAN – JUN 2022
Source: Aurum Hedge Fund Data Engine *Strategy beta to equities is calculated using all funds with all legal structures within the strategy grouping’s 60-month beta to equities, represented by S&P Global BMI (USD).
So far in 2022, hedge funds performed significantly worse than alt UCITS funds in long biased, equity l/s and event strategies. It is interesting to note that these strategies are those with the highest long-term beta to equities (using S&P Global BMI (USD)). Although, we note that using the Capital Assets Pricing Model (CAPM)* does not account for other factors contributing to beta, but these are equity-focused strategies. Strategies with lower beta to equities, where performance may be derived more from alpha, have delivered much stronger performance and protection for investors’ portfolios.
If we look at hedge fund and alt UCITS performance by strategy since 2013, the relationship between high beta strategies and poor performance noted in 2022 is less evident. Perhaps this is unsurprising considering the equity bull market over the period. But regardless of the beta to equities of the strategies, hedge funds have outperformed alt UCITS across all strategies.
PERFORMANCE – JAN 2013 – JUN 2022
Source: Aurum Hedge Fund Data Engine *Strategy beta to equities is calculated using all funds with all legal structures within the strategy grouping’s Jan 13 – Jun 22 beta to equities, represented by S&P Global BMI (USD).
In conclusion, the perceived benefits of alt UCITS continue to come at a significant opportunity cost for investors. Volatility in traditional assets so far this year and investor concern about rising inflation has seen investors seek alternatives. When considering an allocation to alternatives, investors must consider whether the preferential funds terms and additional rules that are specific to alt UCITS funds offer “protection” for their portfolios in times of weakness, and whether these benefits outweigh the opportunity cost of lost returns.
We explore the difference between alt UCITS and hedge fund performance in more detail in the recently published H1 2022 deep dive report which you can read here.
