Why Investors Should Allocate to Hedge Funds – January 2015

SkyBridge Capital

Description

. . . 12% Efficient Frontier 11% Annualized Return 10% 9% Three-asset portfolio: S&P 500, Barclays Aggregate, HFRI Fund Weighted Composite (no % hedge fund allocation constraint) 8% Three-asset portfolio: S&P 500, Barclays Aggregate, HFRI Fund Weighted Composite (up to max 20% hedge fund allocation constraint) 7% Two-asset portfolio: S&P 500, Barclays Aggregate 6% 0% 2% 4% 6% 8% Standard Deviation 10% 12% 14% 16% Chart source: SkyBridge. Period: 1/1/90 (HFRI index inception) through 10/31/14. Data source: HFR for HFRI index, Bloomberg for S&P 500 and Barclays Aggregate indices (total returns used in both cases). As described by HFR: "The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 2,000 single-manager funds that report to HFR Database.

Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds." . . . Figure A Full period return (i.e., not annualized): 1/1/00-12/31/02 HFRI Fund Weighted Composite Index S&P 500 Total Return Index 10/1/07-2/28/09 7/1/11-9/30/11 8.3% (37.6%) (19.2%) (50.2%) (6.8%) (13.9%) 8 Figure B Full period return (i.e., not annualized): 1/1/90-12/31/99 HFRI Fund Weighted Composite Index S&P 500 Total Return Index 1/1/03-12/31/07 3/1/09-10/31/14 534.8% 432.8% 76.8% 82.8% 51.9% 210.0% . 8 Figure C Annualized standard deviation of Multiple of S&P monthly returns from 1/1/90 500 standard (HFRI inception)-10/31/14 deviation HFRI Fund Weighted Composite Index S&P 500 Total Return Index Barclays Aggregate Bond Index 6.8% 14.7% 3.7% 0.5x --- Multiple of Barclays Agg standard deviation 1.9x --- . . Figure D HFRI Fund Weighted Composite Index S&P 500 TR FTSE NAREIT Equity REIT TR S&P GSCI Spot TR NCREIF Property Index TR Barclays US Agg TR HFRI Fund Weighted Composite Index 1.00 0.78 0.49 0.19 (0.03) (0.12) Period: 1Q 1990 through 3Q 20014 (quarterly returns data used as NCREIF returns are only reported quarterly, period start date corresponds to HFRI index inception). Index returns data source: Bloomberg. .     . .