Did Hedge Funds with a Long Track Record Perform better in 2023?

April 2024, By AlternativeSoft

Introduction

2023 was a remarkable year for financial assets. USA inflation rates started to decrease from 6.45% in 2022 to 3.5% in 2023 [1]. Both the equity and fixed-income markets saw a strong rebound after the significantly bearish conditions of 2022. The 30-year average fixed mortgage rates in the United States hit 7.79% in October 2023, the highest since the US housing market crash of 2008 [2]. At the beginning of the year, investors anticipated a drop in corporate profits due to the possibility of the US economy slipping into recession because of elevated borrowing expenses. However, the economy managed to avoid a downturn, even though US interest rates climbed to their highest point in 22 years. Economic growth surpassed expectations, and corporate profits in the US reached nearly record levels from July to September. Despite concerns about geopolitics affecting the markets, companies involved in artificial intelligence experienced significant growth as investors showed confidence in the technology's potential.

Given the geopolitical unrest and rising interest rates, some analysts propose that financial markets may experience a prolonged period of instability, with market volatility becoming the new normal [3]. Financial experts are raising doubts about whether hedge fund managers possess the necessary experience to navigate these challenges. The prevailing theory is that funds led by managers who have weathered past crises are likely to fare better in the current turbulent climate.

Defining Manager Experience

Using AlternativeSoft’s analytical platform, we evaluated the performance of two sets of hedge funds during 2023. One group included funds managed by individuals who commenced their roles before 2007, experiencing prior high-interest rate conditions and the 2008 global financial crisis. The other group comprised funds managed by individuals who began their asset management after 2017, during a period marked by recovery from the global financial crisis and the era of near-zero real interest rates. We formed two equally weighted portfolios and compared their performance based on annualized alpha.

Results

The result of this analysis indicates a considerable outperformance of the portfolio of funds with a long history of asset managers. Those funds whose manager start date was before 2007, created 5.23% alpha (annualized) during 2023 against funds with newer manager start dates.

The risk and return statistics of the portfolios and their comparison with the sector index are shown in Table 1.

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