MSCI hedge fund index offers 10% better return than equities

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.

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