Line chart tracks alpha for hedge funds.
Y-axis: Rolling two-year HFRI Relative Value Index alpha (%); x-axis: 1991 – 2021.
Rolling two-year alpha begins this period near 5.8%, with peaks in December 1993 (near 20%) and October 2010 (near 21%). Sharp declines occurred in December 2008 (from May 2008 to near -10%) and April 2020 (from 1.9% in February 2020 to about -6%). Two other sharp declines followed the peaks, between December 1993 (near 20%) and January 1996 (3.3%); and October 2010 (near 21%) and December 2011 (just over 7%), though in both cases the declines were to levels more representative of the average for this period, which stood at about 5.5%. As of 2021, alpha was about 4.9%.
Sources: © 2021 – Morningstar Direct, All Rights Reserved1 and Wells Fargo Investment Institute. Monthly data from January 1, 1990 to September 30, 2021. Alpha is a measure of excess return and is relative to the Bloomberg U.S. Aggregate Bond Index. For illustrative purposes only. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions, and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. Unlike most asset class Indexes, HFR Index returns are net of all fees. Because the HFR Indexes are calculated based on information that is voluntarily provided actual returns may be lower than those reported. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. HFRI Relative Value Index maintains positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative, or other security types. Bloomberg U.S. Aggregate Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities.
Alternative investments, such as hedge funds, are not appropriate for all investors and are only open to accredited or qualified investors within the meaning of the U.S. securities laws. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions. Foreign investing has additional risks including currency, transaction, volatility and political and regulatory uncertainty.
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- We expect the outperformance of the Relative Value alpha strategy versus the Bloomberg U.S. Aggregate Bond Index to return to its long-term average of over 5%.