Investors are likely to be disappointed by future hedge fund returns because expectations are too high, according to a study by UBS Investme...

Investors are likely to be disappointed by future hedge fund returns because expectations are too high, according to a study by UBS Investment Research. “We would be surprised if the annual rate of return of a diversified hedge fund portfolio over the next five years matches the last 15 years,” UBS said in a report. Over the past 15 years, funds of hedge funds, which invest in a variety of hedge funds, have returned an average 10.5 per cent net of fees, according to Chicago-based data provider Hedge Fund Research, nearly 6.3 per cent more than US Treasury bills. “Expectations of future hedge fund returns could be, as possible with every other investment - real estate, equities, tulip bulbs etc. - too high and a potential source of disappointment,” Alexander Ineichen, managing director at UBS Investment Research, told Reuters. Hedge funds normally charge 1 to 2 per cent annual management fees and up to 20 per cent of any outperformance of set targets or absolute return. Fund of hedge funds add another layer of 1 to 2 per cent management fees and performance fees of around 10 per cent. Estimates put the number of hedge funds at around 7,500, around double the 2000 figure—while assets over the same period have also doubled to around $1 trillion. Most investment in hedge funds comes from high net worth individuals and private banks, although institutional investors are now taking bigger stakes, some as a means of diversifying their proprietary trading.