Which Simple Strategy Is Outperforming Hedge Funds?
- By Bilal Hafeez
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- 1 min read
Hedge funds – the elite investors of finance – are delivering impressive returns. Benchmarks of hedge fund returns for the past 12 months are showing returns of over 20%. We do not have the returns for June yet, so some of these gains may have been lost. Nevertheless, the returns have been strong. On an annual basis, hedge funds returned around 9% in 2019, 10% in 2020 and 8% this year to May.
But a simple strategy any investor can employ has done even better: the much-maligned 60:40 strategy. That is, simply allocating 60% to an ETF that tracks global equities and 40% to an ETF that tracks global bonds. It has delivered 25% over the past 12 months, outperforming hedge funds. On an annual basis, it delivered 17% in 2019, 13% in 2020 and 8% this year (Chart 1). So, it has beaten or matched the performance of hedge funds each year.
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Hedge funds – the elite investors of finance – are delivering impressive returns. Benchmarks of hedge fund returns for the past 12 months are showing returns of over 20%. We do not have the returns for June yet, so some of these gains may have been lost. Nevertheless, the returns have been strong. On an annual basis, hedge funds returned around 9% in 2019, 10% in 2020 and 8% this year to May.
But a simple strategy any investor can employ has done even better: the much-maligned 60:40 strategy. That is, simply allocating 60% to an ETF that tracks global equities and 40% to an ETF that tracks global bonds. It has delivered 25% over the past 12 months, outperforming hedge funds. On an annual basis, it delivered 17% in 2019, 13% in 2020 and 8% this year (Chart 1). So, it has beaten or matched the performance of hedge funds each year.
Many have dismissed the 60:40 strategy as a remnant of a bygone era. With bond yields so low and equities in bubble territory, smarter investment approaches were supposedly needed. But hedge funds are struggling to outperform this simple strategy. Making matters worse, the correlation of monthly hedge fund returns to the 60:40 strategy over the past five years is over 90%. So many hedge funds are not even adding alpha or diversification. No wonder so many end-investors are turning to passive funds.
