Performance Analysis and Attribution with Alternative Investments

 

By Matteo Binfare, Gregory Brown, Andra Ghent, Wendy Hu, Christian Lundblad, Richard Maxwell, Shawn Munday, and Lu Yi.

This white paper provides a summary of existing methods and current research on performance analysis and attribution for complex portfolios that include investments such as hedge funds and private investment funds. We summarize the main challenges of analyzing portfolios with illiquid assets and provide updated analysis for several important asset classes.

Key Takeaways:

  • Using hedge fund return data from a variety of sources, we estimate excess returns using a factor-model approach. Results indicate substantial variation in performance and risk exposure estimates across different data providers. However, most strategies exhibit statistically significant exposure to global stocks, a small stock factor, and an illiquidity factor. We document that risk-adjusted performance (alpha) for hedge funds has averaged roughly 3-5% over the period from 2004-2021 though performance has declined on average since the Global Financial Crisis.

  • Updated performance estimates for private equity funds suggest continued superior performance relative to public market benchmarks matched on portfolio industry and geography characteristics. The performance of private credit funds relative to a public benchmark has been more mixed in recent years.

  • We present a method for deal-level performance attribution of buyout investments. Results include a novel analysis which controls for industry trends in EBITDA multiples and leverage. We find evidence of positive GP-related performance. Much of GP-related contribution is related to higher leverage, but the fraction of the leverage contribution has been declining in recent years.

  • Real estate and other real assets display a trend toward weaker market-adjusted performance in recent years. We also discuss the challenges associated with identifying appropriate benchmarks given data limitations and the heterogeneity of real assets.

 
 
Ruby Atwal