The Economist published an article in its August 1 edition, titled “Fatal Distraction,” arguing that pension schemes are making a mistake in employing hedge funds to manage assets on their behalf: “For the pension schemes that are the hedgies’ latest target, handing over cash makes no sense.” Many of the arguments used in the article are open to debate and we would urge institutional investors to challenge their conclusions.
The chart accompanying the article shows that rolling five-year returns from the hedge fund industry fell from around 20% p.a. in the late 1990s to around 5% p.a. by 2015. In the chart below, in addition to the rolling 5 year hedge fund returns, we have included a line illustrating the level of US equity returns over the same period for comparison.