Top quartile returns in HF space
I'm sure this is an impossible question given the variety of different HFs / strategies but what is considered 'top quartile' for HFs in terms of net IRR? ~15%+ net IRR? ~30%+ net IRR?
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Depends wildly on the fund and the mandate. Market neutral funds vs. global macro funds vs. long-biased funds vs. quant funds all have different risk/volatility/correlation profiles.
Rather than think in IRR terms, you need to think about uncorrelated returns and volatility. A fund with a mid-single digit annualized return profile with low volatility that is actively anti-correlated to equity markets is an incredible fund. A fund with a mid-teens annualized return profile but high volatility and a beta close to 1 is far less attractive.
If you're able to share, what are some funds in the former bucket? (MSD annualized return profile with low vol that is actively anti-correlated to equity markets.) I've never heard of any funds being able to raise significant AUM with MSD type returns.
That makes sense - would you have a general breakdown by strategy e.g., macro funds you hope for XX%+, market neutral you hope for consistent high single digits, etc.?
Thank you - really appreciate the response!
I can't speak to quartiles--I don't have a lot of data on hand, but I'd call the following annualized returns "respectable," based on a non-scientific sampling. Don't place too much weight on these numbers, as I'm sure other people are smarter than me on this topic:
-Multi-manager market-neutral: HSD, with limited volatility and ~0 market correlation
-Single manager long-biased: market returns +2-3ppts, with a beta of 0.7 (implies alpha of 5-6ppts net of fees, if the market compounds at ~10%)
-Macro: HSD, with limited volatility and low market correlation
-Quant: A 1.5+ Sharpe ratio is pretty good. Best funds are >2.5, but are highly capacity constrained to maintain that Sharpe. The structure of most quant funds is that their models show they can achieve a certain Sharpe ratio, and then they set the volatility according to what they think their clients want. So a 1.5 Sharpe strategy could be a mid-single digit returning ~0 risk strategy or a mid-teens modest-risk strategy, depending on the mandate.
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