Reconsidering Funds of Hedge Funds. The Financial Crisis and Best Practices in UCITS, Tail Risk, Performance, and Due Diligence

550 Pages·2013·12.27 MB·English

by  Greg N. Gregoriou (Eds.)

CHAPTER 1
After the Crisis: The
Withering of the
Funds of Hedge Funds
Business?
1
R. McFall Lamm, Jr.
Stelac Advisory Services LLC, New York, NY, USA
Chapter Outline
1.1. Introduction 1 1.7. The Role ofPerformance
1.2. Institutional versusPrivate Decay 9
Investor FoHFs 2 1.8. Outlook 10
1.3. The BubbleBursts 4 Conclusion 12
1.4. The Aftermath ofCrisis 5 References 13
1.5. The Excess Cash Problem 7
1.6. CouldFoHFsProblemsHaveBeen
Prevented? 7
1.1. INTRODUCTION
Fromtheearly2000suptothefinancialcrisis,thefundsofhedgefunds(FoHFs)
business was one of the most rapidly growing sectors of the financial products
world.Indeed,FoHFsassetsundermanagement(AUM)multiplied10-foldfrom
theturnofthecenturytoapeakatwelloverUS$2trillionatthebeginningof2008.
Growth in FoHFs assets even exceeded the pace of expansion in the underlying
hedgefundindustrywiththeFoHFsmarketsharerisingfromaroundathirdoftotal
hedgefundassetsin1999tohalfatthemarketcrescendo(Figure1.1).
The feeding frenzy driving asset flows into FoHFs was in large part due to the
stellar performance record of the 1990s, when returns significantly exceeded
those of plain-vanilla stock and bond portfolios. This point was made by
Edwards and Liew (1999), Lamm (1999), Swensen (2000), and others who
increasedawarenessoftheadvantagesofhedgefundinvesting.However,thekey
event sparking industry expansion was the bursting of the technology bubble
from 2000 to 2002. As investors watched the NASDAQ and S&P 500 fall 78%
and 49% from peak to trough, hedge funds and FoHFs collectively delivered
positive returns. Very soon afterward, institutional consultants began to bless
ReconsideringFundsofHedgeFunds.http://dx.doi.org/10.1016/B978-0-12-401699-6.00001-0
Copyright(cid:1)2013ElsevierInc.Allrightsreserved.
2 SECTION 1 Due Diligence and Risk Management
2500
2000 Total (including CTAs)
Fund-of-funds
n 1500
o
Billi 1000
Source: BarclayHedge.
Data for 2012 are through
500 the first quarter.
0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0
1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2
FIGURE 1.1
HedgefundindustryAUM.
allocations to hedge funds as suitable investments. This unleashed a massive
flood of inflows from pension funds, endowments, and foundations that
continued unabated untilthe financialcrisis.
The original business proposition put forward by FoHFs was very enticing and
offered extraordinary value for investors. FoHFs provided hedge fund due dili-
gence, manager selection, and portfolio management in one convenient
package.CostswerereasonablewithmostFoHFscharginga1.5%management
fee, which wasabout the same as that ofactiveequity managers.
Less popular were FoHFs incentive fees of as much as 10e15%. However,
incentivefeesweretypicallyappliedonlywhenacashhurdleratewasexceeded,
making the charges more palatable especially when investors believed they
wouldreceiveasuperiorreturnstreamwithdownsideprotectionduringadverse
market developments. Furthermore, because it was costly and time-consuming
for investors to build their own hedge fund portfolios in what was an opaque
and highly specialized field, FoHFs offered institutions an easy first step and
immediate exposure. FoHFs also provided a doorway for private investors e
many of whom lacked sufficient scale and expertise to construct adequately
diversifiedportfolios einto hedge fund nirvana.
AnothercompetitiveadvantageoftenpromotedbyFoHFswasthattheyhadaccess
tothebesthedgefundmanagerswho oftenwould not acceptmoneyfromnew
investors.FoHFscouldeasilymeetthelargerminimuminvestmentsoftenrequired
byverysuccessfulhedgefundsandoftenqualifiedforbettertermse‘mostfavored
nation’statusebecausetheybroughtlargeamountsofassetstoeagerrecipients.
Investorscouldnothopetoreceivetheequivalenttreatmentontheirown.
1.2. INSTITUTIONAL VERSUS PRIVATE
INVESTOR FoHFs
Thesurgeininstitutionalinvestmentsafterthe2000e2002marketcrashledto
a sharp polarization of the FoHFs industry. Some firms such as Grosvenor,
After the Crisis: Downturn in FoHFs Business CHAPTER 1 3
Blackstone, Blackrock, Lyxor, Mesirow, and Pacific Alternative Asset Manage-
ment concentrated on serving the nascent institutional market. Others such as
Permal and GAM, as well as banks such as Credit Suisse and JP Morgan,
specialized in satisfying privateinvestordemand.
The institutional and private investor segments of the FoHFs industry operate
quite differently. Institutionally oriented FoHFs tend to have lower fees due to
economies of scale and intense competition for the large pools of money typi-
cally available. Furthermore, because US institutions traditionally made larger
allocationstohedgefundsthantheircounterpartsinEuropeandelsewhere,the
institutionalFoHFsbusiness became very US-centric.
In contrast, FoHFs focusing on the private investor market segment needed
large distribution networks, which required higher fees to compensate
sales staff. In addition, because US private investors are subject to substantial
taxes on FoHFs returns, they tended to limit hedge fund allocations in
preference to tax-advantaged assets.1 This was not the case for investors with
money stashed in the European tax havens. As a result, FoHFs based in
Europe came to control a disproportionately large share of private investor
assets.
TheUSinstitution-dominatedFoHFssegmentevolvedintoafairlysophisticated
andprofessionalenterprise.However,lessregulationinEuropegraduallyledto
an erosion of standards in private investor FoHFs. Na¨ıve high-net-worth indi-
vidualsinEuropeantaxhavenswereaparticularlyinvitingtargetsincetheywere
largely captive, not well-informed, and could not loudly protest mismanage-
ment inpublic. Feesescalated as someprivatebanks evenbeganto applysales
charges to initial FoHFs investments. Some FoHFs managers became overly
aggressiveandbegantochargecoststothefundthatshouldhavebeenabsorbed
in management fees. A few FoHFs began to employ leverage to amplify
performance(andhelpoffsethighfees)whileotherstooktoinvestingdirectlyin
otherassetssuchasstocksusinginvestorfundssupposedlyearmarkedforhedge
funds. Perhaps most egregious was the emergence of fund-of-fund-of-funds
(i.e., fund managers created portfolios of FoHFs while extracting yet another
layerof fees).
For sure, such shenanigans were atypical in the private investor segment e
adverse publicity could potentially damage reputations and ultimately harm
business. Nonetheless, there was a dark tint around the edges of the
European FoHFs business. The problem was compounded by woefully
inadequate transparency. For example, many FoHFs did not disclose the
names of the hedge funds held in the portfolio, much less the rationale
behind manager engagements or terminations. In many cases, investors
received no more than a monthly statement accompanied by a one-page
1Acommonrule-of-thumbisthatapproximately80%ofFoHFsreturnsareshort-termcapital
gains,whicharetaxedatordinaryincomeratesthatapproach50%inhigh-taxstates.
4 SECTION 1 Due Diligence and Risk Management
newsletter that contained little except vague jargon describing why industry
returns were up or down. Imagine investing in a hedge fund portfolio and
knowing virtually nothing about how your money was invested, but this was
commonplace.
If that is not enough, FoHFs marketing was often less than candid. Sales
personneloftentoutedhedgefundexposureviaFoHFsasofferinggoodreturns,
low volatility, no or little downside risk, and zero correlation with stocks. Left
unsaidwasthefactthathedgefundscoulddeliversubstantiallynegativereturns
or even ‘blowup’ and that correlation with equity markets had reached
uncomfortablyhigh levels.
1.3. THE BUBBLE BURSTS
Aseveryoneisaware,thecollapseofLehmanin2008precipitatedasharpdrop
infinancialassetpricesthatprovedthemostextremesincetheGreatDepression.
Hedge funds were caught up in the maelstrom and the majority experienced
unprecedented drawdowns with even some icons such as Citadel and Farallon
faltering.FoHFspassedthroughthesharplossesontheirunderlyinghedgefund
portfoliosdirectly to investors.
The reactions to large FoHFs losses by institutions and private investors were
quitedifferent.Forexample,Williamson(2010,p.1)reportedthattheassetsof
thetop25FoHFsdeclined37%frommid2008totheendof2009whileFoHFs
managerswithamajorityofassetsownedbyinstitutionsexperiencedadecline
of only 23%. In this regard,‘institutions were a life raft for FoHFs managers’
except for a few firms ‘like Union Bancaire Privee and Man Group, which had
exposure to the Madoff Ponzi scheme.’ For institutions, there was no rush to
redeem.
Instarkcontrast,privateinvestorswereshockedbythesharplossessustainedby
FoHFs e losses that many had been led to believe could never occur. Panic
ensued and private investors began to redeem in droves. As the rush to exit
intensified, FoHFs managers were ensnared in a situation where numerous
hedgefundsintheirportfolioshadsuspendedredemptionsandtheircapitalwas
locked up indefinitely. This in turn made it impossible for FoHFs to honor
redemption requestsfrom their investors.
Of course, most FoHFs did their best to meet redemption demand by exiting
fromhedgefundsthatwerenotlockedup.However,thisapproachleftFoHFs
holding the worst-wounded managers, and their portfolios soon became top-
heavy with near dead and dying hedge funds burdened with illiquid assets
wherenooneknewhowlongthework-outprocesswouldtake.Furthermore,in
cases where exit was possible, FoHFs often had to pay pejorative early
redemption charges, thus reducing liquidation proceeds and exacerbating
losses. The only option available for most FoHFs managers was to exit when
they could and wait for struggling hedge funds in their portfolios to begin to
return capital.
After the Crisis: Downturn in FoHFs Business CHAPTER 1 5
25% FIGURE1.2
Year-over-year returns
20% CompositehedgefundindustryreturnversusFoHFs.
15%
10%
5%
0%
-5% Composite
-10% FOFs
-15% Averages of reported
returns from HFR,HFN
-20% and BarclayHedge through
first quarter 2012.
-25%
2004 2005 2006 2007 2008 2009 2010 2011 2012
As a result, FoHFs performance dipped substantially below that of the hedge
fundindustryduringtheredemptionhiatusin2009.2Forexample,FoHFslosses
were more or less in line with the hedge fund industry in 2008 e a negative
21.4%forFoHFsversuslossesof19.0%forthehedgefundindustryaccordingto
HedgeFundResearch(HFR).However,in2009eastrongperformancerebound
yeare HFR reports that hedge funds gained 20.0%while FoHFsreturned only
11.5%. The 8.5% underperformance gap was unprecedented. Hedge Fund Net
(HFN) and BarclayHedge report even larger differentials of 9.9% and 13.5%,
respectively(Figure 1.2).
By 2010 most hedge funds were again making redemptions and FoHFs were
gradually able to unwind frozen positions and rebalance their portfolios.
Nonetheless,anunusuallywideunderperformancegappersistedwiththehedge
fundindustryreturning10.6%in2010whileFoHFsdeliveredonly5.2%based
on an averageof returnsreported byHFR, HFN, and BarclayHedge.3
1.4. THE AFTERMATH OF CRISIS
The mass exodus by private investors caused the share of hedge fund industry
assets held by FoHFs to decline during and after the crisis. BarclayHedge data
showthatFoHFsassetspeakedat51%ofhedgefundindustryassetsin2007,but
fellto26%bytheendof2011.HFRdatashowalowerpeakeat45%ofassetsin
2006eandamilderdeclineto34%ofassetsattheendof2010.Regardlessof
theexactamount,itisclearthattheFoHFsindustryshrankdrasticallymorethan
the broadhedgefund industry.
2WhilemanyFoHFspermitquarterlyredemptionwith45days’notice,othersrequirelonger.Most
investorsdidnotbecomeawareofthecarnageinFoHFsperformanceuntilaftertheSeptemberstock
marketcollapse.Thismeantthatthepeakinredemptiondemanddidnotcomeuntiltheendof
theyearandinthefirstquarterof2009.
3HFR,HFN,andBarclayHedgedataareusedbecausethesesourcesreportperformanceforboth
hedgefundindustrycompositeandFoHFs,havethelongesttrackrecords,andalsomaketheirdata
publiclyavailableviawebsite.
6 SECTION 1 Due Diligence and Risk Management
WhataccountsfortheextremeshrinkageoftheFoHFsindustry?First,asalready
discussed,muchofthedeclineinFoHFsassetswasclearlyduetothedeparture
ofprivateinvestorswhowerenotpreparedbytheirbrokersandbankersforthe
significantlossesexperiencedin2008.Theseinvestorslearnedthetruththehard
wayand voted withtheir feet.Most willlikelyneverreturn toFoHFsinvesting.
Second, while institutions were not in the vanguard of FoHFs investment liqui-
dations,theynonethelesssufferedfromthesignificantunderperformanceofFoHFs
versusthehedgefundindustry.Toavoidarepeatofthisinthefuture,institutions
thatinvestedinFoHFsinanticipationofeventuallymanagingtheirownhedgefund
portfolioswerenodoubtspurredtoexpeditetheprocess.Forexample,Williamson
(2011) reports numerous examples of institutions shifting from FoHFs to direct
hedge fund investing. In addition, Jacobius (2012) shows that for the top 200
definedbenefitplans,FoHFsinvestmentfellsharplyfromnearly50%ofinstitu-
tionalhedgefundholdingsin2006toapproximately25%in2011(Figure1.3).
Anaddedmotivationfordirectinvestinginhedgefundsbyinstitutionsinlieuof
using FoHFs was that doing it yourself became significantly easier after the
financialcrisis.Hedgefundsmadeaconcertedefforttoimprovetransparencyand
communicationeimportantinstitutionalrequirementseinaconsciouseffortto
acquire stickier pension fund money to rebuild their asset base. Moreover, the
available talent pool of professionals knowledgeable about direct hedge fund
investing swelled after many FoHFs reduced staff. This allowed institutions to
recruit their own in-house experts or hire consultants at more reasonable fees.
Why settle for potential FoHFs illiquidity and underperformance when you can
eliminatetheintermediarythroughdirectinvestment?
Paradoxically,itnowappearsthattheFoHFsunderperformancegapwaslargely
a temporary phenomenon arising from the severe conditions experienced
duringthecrisis.Indeed,HFRreportsthatthehedgefundindustrylost5.3%in
2011 while FoHFs posted a negative 5.5% e the wide underperformance
differentialof2009 and 2010 had shriveled to almostnothing.
120
Via FOFs
100
Direct investment
80
n
Billio 60
40
20
Source: Pension & Investments
0
2006 2007 2008 2009 2010 2011
FIGURE 1.3
Top200pensionFoHFsassets.
After the Crisis: Downturn in FoHFs Business CHAPTER 1 7
100% FIGURE1.4
90% EstimatesofFoHFshedgefundexposure.
80%
Hedge fund investments
70%
Cash and other
60%
50%
40%
30%
20%
10%
0%
2006 2007 2008 2009 2010 2011 2012
1.5. THE EXCESS CASH PROBLEM
WhiletheredemptionmismatchbetweenFoHFsandhedgefundsinitiallyplayed
aroleincausingtheunderperformancegap,FoHFswerealsoatfaultin2009and
2010byallowingcashholdingstoaccumulatetoinordinatelyhighlevels.Osten-
sibly, the rationale behind cash accumulation was to meet future redemption
obligations and to provide a safety net to protect against ongoing duress in the
globalfinancialsystem.Thismiscalculationprovedcostly.Myestimatesindicate
thatFoHFsinvestmentsinhedgefundsmayhavefallentoalmosthalfoftotalassets
at the nadir in December 2009. Cash holdings, the monetization of early
redemptionfees,andotherfactorsaccountfortheremainingexposurebasedon
asampleof42prominentFoHFs(Figure1.4).4Thesehighcashholdingsandthe
paymentofearlyredemptionfeesclearlyrepresentedadragonperformanceatthe
timeandweremajorcontributorstotheperformancegap.Now,withtheinvest-
mentenvironmentstabilizedandredemptionstressended,FoHFshaveredeployed
liquidityintohedgefundsandrevertedtomorenormalcashlevels.
1.6. COULD FoHFs PROBLEMS HAVE BEEN
PREVENTED?
To some analysts, it is not surprising that hedge fund and FoHFs performance
deteriorated significantly in 2008. The reason is that the hedge fund world
changeddramaticallyduringitsevolutionfromthesmallcottageindustryofthe
4TheestimatesofFoHFshedgefundexposurearederivedusinganalgorithmthatproducesthe
bestfitbetweenaveragereportedreturnsfor42FoHFspresumingthateachheldanunderlying
portfoliothatdeliveredtheaverageofHFR,HFN,andBarclaycompositehedgefundreturns.
Thealgorithmusedis:rtFOF ¼wtð1(cid:2)dtflÞrtHFþð1(cid:2)wtÞrtC(cid:2)fFþεt,wherertFOF istheaverage
42-FoHFsreturn,rtHF isthehedgefundcompositereturn,rtC isthecashreturn(3-month
Treasuries),w istheportionofFoHFsassetsinvestedinhedgefunds,fIistheincentivefee,fFis
t
thefixedFoHFsfee,andε ismeasurementerror.Thebinaryperformancefeevariabled equals
t t
zeroiftheunderlyinghedgefundportfolio’sreturnisnegativeandunityiftheunderlyinghedge
fundreturnispositiveyear-to-date.Therelationshipisestimatedviarestrictedleastsquares
subjectto0(cid:3)w <1.
t
8 SECTION 1 Due Diligence and Risk Management
1.0
Trailing 24 months vs. MSCI
0.9 world equity returns
0.8
0.7
0.6
HFR
0.5
HFN
0.4 Barclay
0.3
1994199519961997199819992000200120022003200420052006200720082009201020112012
FIGURE 1.5
FoHFsreturncorrelationswithequities.
1990stothe behemoth it became inthe new millennium. Forexample,global
macro funds dominated the hedgefund worldin the 1990sand accounted for
nearly half of industry assets e as underscored by Morley (2001) and Lamm
(2002). By 2008, global macro funds represented less than 20% of assets. In
theirplacewerecohortsofequitylong/shortmanagersandotherequity-related
strategies, which comprised as much as two-thirds of industry assets when the
financial crisis ensued. As the transition to dominance by equity-linked strate-
gies unfolded, the correlation between FoHFs returns and equities rose signifi-
cantly, reaching0.9 by2006 (Figure 1.5).
The steady rise of hedge fund and FoHFs correlation with equities did not go
unnoticedamongindustrypractitioners.Lamm(2004)describedthesituationas
onewherehedgefundindustryperformancewasmorphingintolittlemorethan
camouflagedequitybeta.TheobvioussolutionpromotedbyLamm(2003,2005)
was greater diffusion in FoHFs hedge fund portfolios e away from correlated
strategiessuchasequitylong/shortandtowardsglobalmacromanagerseinorder
toimproveportfoliodiversificationcharacteristics.Nonetheless,thevastmajority
ofFoHFscontinuedtoinvestinamixofhedgefundsthatessentiallymirroredthe
industry’scompositionanditsgrowingdependenceonequity-linkedstrategies.
The equity correlation reality struck full force with the financial crisis as the
precipitous decline in stock prices was transmitted directly through as large
losses for FoHFs investors. In this regard, the FoHFs industry could have done
better in 2008 if portfolios were more diversified and firmly tilted to global
macro strategies, which did in fact produce positive returns during the period.
Thatsaid,ifonewasinvestinginFoHFstomimichedgefundindustryreturns,
the performance slump of the FoHFsindustry wasunavoidable.5
5Therewereactuallyafewwell-knownFoHFsthatspecializedinmacrostrategiesthat
performedfairlywellin2008,suchasPermalMacroHoldings.Suchfundsrepresentedonlyasmall
portionofindustryassets,however.
After the Crisis: Downturn in FoHFs Business CHAPTER 1 9
As for the deleterious effect of redemption suspensions, such conditions had
not occurred previously and would have required planning for a contingency
never before experienced. Of course, in theory one might imagine that
redemption suspensions might happen under certain circumstances and there
were a few FoHFs that had a policy of restricting their exposure to hedge
funds that only offered monthly liquidity. This approach paid off well during
the crisis because the underlying hedge funds traded assets in liquid markets
and did not suspend redemptions. However, the longer-term performance of
such FoHFs usually is worse than average since the best managers normally
requireat leastquarterlynoticeandsome form oflock-uporearlywithdrawal
penalty. As a result, to provide competitive performance the vast majority of
FoHFs did not limit themselves to funds with monthly liquidity and it is
difficult to see how the FoHFs industry could have escaped the redemption
problem.
1.7. THE ROLE OF PERFORMANCE DECAY
One other factor that may explain the rise of direct hedge fund investing and
tempered the rebound in FoHFs assets is the ongoing decline in hedge fund
performancecomparedwithotherassets.Thatis,evenbeforethefinancialcrisis,
the return stream delivered by hedge funds (and FoHFs) was significantly
deterioratingversusplain-vanillastockandbondportfolios.Thisisillustratedin
Figure 1.6, which shows running 10-year Sharpe ratios using FoHFs returns
reported by HFR, HFN, and BarclayHedge versus the performance of a 60%
stock/40% bond portfolio as represented by S&P 500 and Barclay Aggregate
returns.
Figure 1.6 clearly shows that FoHFs (and, by default, hedge funds) provided
superiorrisk-adjustedreturnsfortrailing10-yearperiodsthrough2010,though
thedifferencewasnarrowing.However,by2011theSharperatiosforFoHFshad
convergedwiththoseoftheplain-vanillastockand bond portfolioforthefirst
time.Now,foralmostayearthetrailing10-yearSharperatioforFoHFshasfallen
1.6 FIGURE 1.6
Ten-yearSharperatios:FoHFsversus
1.2 The stock and bond portfolio plain-vanillastockandbondportfolio.
consists of 60% invested in the
S&P 500 and 40% in the Barclay
Aggregate rebalanced quarterly.
0.8
0.4
HFR
HFN
0.0
Barclay
60/40
-0.4
2006 2007 2008 2009 2010 2011 2012
10 SECTION 1 Due Diligence and Risk Management
belowthatofthe60%stock/40%bondportfolio.Thissuggeststhatatleastfor
the past decade, holding FoHFs in lieu of a plain-vanilla stock and bond port-
foliohas not enhancedinvestment performance.6
Astute asset allocators may have noticed the downward trend in FoHFs perfor-
manceandtakenthisintoaccountinmakingdecisionsabouthowmuchhedge
fund exposure is desirable. If one expected the Sharpe ratio decay to continue,
then this may have tempered allocations to FoHFs and reduced inflows.
Furthermore, the relatively greater decline in FoHFs performance vis-a`-vis the
hedge fund industry may have encouraged more direct investment in hedge
funds than would otherwise be the case since a reasonable expectation is that
one shouldbe able torealizebetterperformance byeliminatingFoHFsfees.
NotethatthisconclusionethatthereturnsofFoHFsarenobetterthanaplain-
vanilla stock and bond portfolio over the past decade, takes reported perfor-
mance at face value. As is well known, hedge fund and FoHFs performance is
overstated due to survivor bias as described by Fung and Hsieh (2000, 2009),
Liang (2000), and others.Recently, Xu et al. (2011) found that survivor bias in
FoHFs returns over the 1994e2009period averaged from 0.2% to 3.9% annu-
allyusingvariousmeasuresofbias.Inaddition,DichevandYu(2011)arguethat
the return investors actually receive e the dollar-weighted return e averaged
6.1% for FoHFs versus a buy-and-hold return of 13.8% over the 1980e2008
period.Forthisreason,theactualperformanceofFoHFsmaybeabitworsethan
indicated.
1.8. OUTLOOK
AUMforFoHFshaveremainedstagnantataroundUS$0.5trilliondollarsforthe
past 4 years. This contrasts with the overall hedge fund industry, which has
experiencedareboundbacktonearthepeakreachedatthebeginningof2008.
Whether the FoHFs industry starts to grow again remains to be seen. Never-
theless, it is clear thatFoHFs facea quite challenging future.
I believe there are three major developments that will shape the evolution of
the industry. First, many analysts expect investment returns to be subdued in
the coming years due to demographics, the paying down of unprecedented
sovereign debt accumulated since the crisis, and the imposition of new
austerity measures such as higher taxes. In such an environment, it will
become increasingly difficult to justify FoHFs fees. For example, a 1.5% FoHFs
management fee plus incentive appreciably reduces investors’ returns if
financial assets are delivering only low single-digit performance. This was less
of an issue in the double-digit returning world of the past. However, if low
6Theresultsareevenmoresignificantifoneexaminesthepasthalf-decadeeFoHFsreturns
aremuchlowerthanfora60%stock/40%bondportfolioonarisk-adjustedbasis.Asfortotal
returns,a60%stock/40%bondportfoliohasperformedsubstantiallybetterthanFoHFsoverthe
past10years.