A close look at all of the HFR hedge fund index returns over the last three years shows a significant amount of clustering of styles with the only outliers associated with country and sector indices. For 60 indices, the average three year (May 2014 – May 2017) annualized return was 3.04 percent and the average annualized volatility was 5.61 percent. Outliers are focused on sector indices like technology and energy and country or regional indices like India or Latin America.

The quest in hedge fund investing is to find managers who do not fall within the cluster but can generate better returns. Of course, the range of return and risk would be wider of individual managers but if you had to start with a simple judgment of what you will receive with a portfolio of hedge fund managers it is likely to be closer to an information ratio of .6 and a return and risk of 3 and 5.5 percent. These numbers are dynamic, but they are a long way from the expectations that managers provide information ratios above one and annualized returns over 10 percent.