Typically, investors claim that they look several years out when they choose an investment. In reality, the turnover of their portfolios will tend to be much faster due to drawdowns. Even with pension funds' assets/liabilities management style, it is sometimes difficult to convince trustees to hold a loosing investments. The graph below represents the 3 years rolling returns of hedge funds and US equities. Hedge funds have overperformed US equities in 75.5% of the 192 three years period between December 1993 and November 2012. Furthermore, hedge funds have lost money (-1.33%) in only one period compared to US equities which were in a drawdown during 69 periods. A pension fund targeting a 2% annualized return over three years will have delivered in 80% of the period by being fully invested in hedge funds.
3 Years rolling returns from December 1993 to November 2012
Dow Jones Credit Suisse Hedge Fund Core Index/S&P 500 (^GSPC)
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