Apples To Apples Hedge Fund Comparisons: AIMA

Hedge funds are usually compared to the S&P 500 (INDEXSP:.INX) or some other stock index as a way of deciding whether the fund is underperforming, but this approach suggests that investors have to decide between the two when they usually play different roles in a portfolio. This approach makes sense when comparing different asset classes (eg the spread between stocks and bonds) when deciding how a portfolio should be weighted, but even this breaks down when choosing hedge funds.

“Hedge funds are not an asset class. They are a way of managing money that typically features managers who have more tools at their disposal, more freedom of manoeuvre, and more specialised strategies,” says a recent Alternative Investment Management Association (AIMA) research...