Returns which a hedge fund can generate, or assumed to be generating, above the risk-free rate, regardless of the prevailing economic conditions, and without being exposed to major drawdowns of the stock and bond markets. However, hedge funds are not absolute return generators that deliver positive returns every month. Empirical studies show that hedge funds’ returns suffer, like other types of investments, considerable dispersion, but at lower magnitude than traditional asset classes (such as stocks).
This is typically reflected in the practical fact that the Sharpe ratio of hedge funds is notably superior to that of the stock and bond indexes.
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