MSCI hedge fund index offers 10% better return than equities

Morgan Stanley Capital International (MSCI), the provider of benchmark indexes for financial institutions, has released the first performance data for its newly established family of hedge fund indexes. The results were compiled from back-dated data covering a span of eight years, beginning January 1994.

The report highlights the performance of the MSCI Hedge Fund Composite Index, comprising 370 equally weighted funds with more than $15 million of assets under management. During the past five years, the Hedge Fund Composite Index outperformed the MSCI World Equity and the MSCI Global Sovereign Bond indexes by around 10%. The total return of the composite hedge fund index over the five-year period was 13.49%, while the MSCI World returned 1.55% and the MSCI Global sovereign returned 3.57%.

Equity funds form the biggest constituent of the Hedge Fund Composite Index at 66%, with fixed-income funds comprising 8%, and diversified asset-focused funds representing 18%.

The best equity performers over the past 12 months have focused on small capitalisation issues, showing a return of 5.4%. On a geographical level, the best performing hedge funds over the past 12 months have focused on investments in Japanese securities, showing a return of 5.3%.

The MSCI Hedge Fund Composite Index figures contrast with the performance of the Van Hedge Fund Index, a composite index compiled by global hedge fund advisory firm Van Hedge Fund Advisors. The latter shows a return of -1.4% for US hedge funds and –1.0% for offshore funds in the three months ending June. The MSCI Composite Index shows an increase of 2.28% over the three months ending May.

But MSCI explained that selection bias - the different composition of different indexes - could play a role in the varying performance.

MSCI also acknowledged that survivorship bias could play a factor in the long-term index performance over the last eight years. Survivorship bias describes the tendency of defunct funds dropping out of the index. This can give a positive skew to the overall performance of the index.