Excess hedge fund returns have plummeted since the
mid-nineties, and some clients have cut their exposure.
The return generated from hedge fund strategies in excess of
their benchmark has deteriorated from an annualized 8.2 percent
in the 1990s to just 0.6 percent over the past decade,
according to new data.
The discovery, reported in Northern Trusts 2017 five-year investment outlook, comes a day
after a separate UBS report found that family offices had cut
their allocations to hedge funds by 1 percent in 2016. The UBS Global Family Office report found that
some movement away from this asset class has been
observed for the second consecutive year.
Earlier this year, a JPMorgan survey concluded that three
quarters of large investors were disappointed by the
performance of their hedge fund portfolios in 2016.
[II Deep Dive: The Incredible Shrinking Hedge Fund
Northern Trusts Capital Market Assumptions report
an annual piece of research providing a five-year
outlook that will inform the investment management firms
asset allocation decisions was written by some 15
investment professionals including chief investment officers.
It predicted that hedge fund strategies will make a 4.4 percent
annualized total return over the next five years beginning July
While hedge funds strategies have the ability to provide
uncorrelated returns to traditional portfolio assets, the
report stated that the amount of alpha generated by hedge funds
has deteriorated considerably since the nineties, citing
Bloomberg and HFR as data sources.
Across all asset classes, private equity and emerging market
equities were forecasted to perform best over the coming five
years, with Northern Trusts investment strategists
predicting an 8.4 percent return for each strategy. However,
the reports authors conceded that estimating private
asset returns accurately is difficult due to the absence of
As for emerging market equities, predicted to be the top
performing traditional asset class, the report suggested that
low valuations and a stable economic outlook allow for
some valuation expansion.
Northern Trust also estimated that natural resources would
produce a 7.4 percent total return over the five-year period.
While the authors noted that the modest growth
environment would likely impact demand for the sector,
they argued that demand was not dead and that
underinvestment would eventually pressure
Global real estate was forecasted to return 6.1 percent,
while global listed infrastructure was predicted to produce a
5.8 percent return over the same five-year period.