The spectacular investment returns of the hedge fund industry were thrown into doubt yesterday as Barclays Capital said the figures were being exaggerated by as much as 6 percentage points a year, reports the Times .
The flattering picture of the industry had emerged as a result of imperfections in the way many hedge fund indices were compiled, Barclays said. The investment bank put the typical level of overstatement at 1 to 6 percentage points per year, depending on the index.
Even an overstatement of 1% per year would mean hedge funds — billed as the best-performing asset class over ten years — had in fact been outpaced by shares.
The paper says if it were as much as 6%, it would mean hedge funds were in fact producing less than half the annual investment returns of 11% to 12% routinely claimed for them.
Barclays outlined a series of methodological failings by index compilers, including survivorship bias — the tendency to ignore funds as soon as they close or fail. This alone added between 2% and 4% a year to index performance figures, according to academic studies, Barclays said.
Another study estimated the effect of survivorship bias at 2.44% on an index where all funds were treated equally, and 0.85% for weighted indices.
Barclays said returns were also exaggerated because of selection bias, the result of some hedge fund managers choosing not to report figures, especially when they have performed poorly.
A third problem was known as instant history bias: funds tend to wait for a period of strong performance before publishing their figures and entering an index. This strong performance is then backdated into the index.
Two large hedge fund index compilers, Credit Suisse/Tremont and Standard & Poor’s, declined to comment on the report.
Between 1994 and 2005, US shares produced an average annual return of 10.6 per cent, just outpaced by hedge funds, which according to Credit Suisse/Tremont, produced an 11% average annual return.
The findings come as the Financial Services Authority signalled it was prepared to see hedge funds take on more debt, describing current levels of leverage as “moderate”.
CRITICISMS BY the Confederation of British Industry (CBI) of Lord Turner’s pension proposals are unfounded and do not reflect the views of most businesses according to a survey of almost 1000 employers published on Monday, reports the Financial Times.
The CBI last week said that proposals by Lord Turner’s Pension Commission, which would force employers to contribute to a new national pensions savings scheme (NPSS), could put many small companies out of business and lead to larger ones reducing existing pension contributions.
Under the Turner proposals, companies would be required to contribute 3% of salaries into the NPSS if their employees opted to join the scheme.
But the paper says a survey by the Chartered Institute of Personnel and Development (CIPD) found that more than 80% of employers had “no intention of changing their existing pension”. Only 1% said they would “opt for the NPSS to cut costs”. Employers were also “twice as likely to say that the proposed 3% contribution towards occupational pensions is too low, as to say it is too high”.
The CIPD said: “Some critics claim that the NPSS would encourage employers to withdraw more generous provisions, but this does not appear to be the case.” Charles Cotton, its rewards adviser, said: “Our survey shows that the vast majority of UK employers will not be affected in the way that many critics would have you believe. In fact, the overriding view among some of our sample is that Lord Turner has been lenient on employers.”
The survey suggests Lord Turner has “struck a sensible balance with the setting of minimum standards”, and that it is “a myth” that small employers do not contribute to pensions. The majority of companies with between 25 and 99 staff “do contribute”.
The CIPD said it was only companies with fewer than 25 staff, which typically did not contribute to pensions, that were concerned about the potential impact on costs of a compulsory scheme.
The CBI argues there must be an equal right for businesses and employees to opt out of the scheme, and that there will be pressure from employees for wage increases to compensate for new and additional pension contributions.IFAonline
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