History of alternative investments began with demonstration of striking success of fund managed by A.W. Jones. In 1965 Jones published results of his fund in American business media for the period of 1961-1965. Fund’s performance results were far beyond the best mutual fund – Fidelity Trend Fund – by 100 percentage points, including fund’s manager fees.

One of the spectacular examples of hedge fund activities is George Soros’s Quantum fund, based upon the strategy named Global Macro. During 32 years of its activity (from 1969 till 2000) 29 years had positive results and only 3 years were finalized negatively. Weighted average annual return for the whole period reached 107.9%, but the most substantial annual negative result was -22.9%.

The history of one or two funds may be a particular case. But the industry in general, considering composite indices, has been showing higher risk adjusted returns on capital than market average for decades. This was especially noticeable during the downturn market periods or the “bear” markets. Changes in the return on classic types of investments during market fall can be shown on the examples of global stock index (MSCI World Index) and American stock market index (S&P 500 Index). When the bubble of Internet-technologies companies has burst (August 31, 2000 – August 31, 2001) the indices mentioned above had fallen by 25.11% and 24.39%, respectively. During the terroristic attacks of September 11 (August 31 – October 31, 2001) they decreased by 7.04% and 6.29%, respectively.

Composite hedge fund indices, on the contrary, were able to demonstrate their superiority. According to data provided by Hedge Fund Research, HFR Fund of Funds Composite Index during the fall of Internet-technologies companies has fallen by only 0.36%. But HRF Macro Index and HRF Short Selling Index have shown returns of 3.58% and 68.14%, respectfully.

During the terroristic attacks of September 11, when the entire world has been shocked, HFR Fund of Funds Composite Index fell by 0.66%, but HRF Macro Index and HRF Short Selling Index grew by 3.36% and 4.24%, respectively.

Chronicles of financial markets in 2008 will be remembered as one of the most devastating periods in financial history.  World stock indices have experienced double digit losses. When speaking about best results, one has to mention lesser of losses rather than higher of returns. But even in these circumstances, hedge fund industry looked better than the classic market.

According to the report prepared by Hedge Fund Research, due to strong volatility and problems at the market in 2008 there was significant variance in returns between separate hedge funds and fund strategies. One tenth of the hedge funds has shown average fall by 62%, while 10% of the funds have grown by 40% on average.

By looking at the industry by types of strategies, HFRI Macro Index has grown by 5%, HFRI Short Bias Index (hedge funds with primarily short selling strategies) has grown by 29%, which is 2008 record. Funds investing in mortgage securities have also shown positive results (HFN Mortgages Average Index grew by 20%).

For comparison: in the classic segment American mutual funds hosting about 9.4 trillions USD had average losses of 30% in 2008, while the worst indicators were at -60% level. As The Washington Post has noted, none of the American mutual funds with amount of assets exceeding 100 million USD investing in stock market, has shown positive annual return in 2008.