Hedge funds out-performed equities and bonds on a risk-adjusted basis in 2016, alternative investment trade body AIMA says, producing around $120bn in net gains for their investors.

An AIMA study, in partnership with data firm Preqin, shows hedge funds’ risk-adjusted return, as measured by the Sharpe ratio, was 1.45 for the year, ahead of the S&P 500 (1.1), MSCI World (0.68) and Barclays Global Aggregate (0.20) indices.

The analysis, based on a database of more than 3,000 funds, found that hedge funds outperformed stocks and bonds on a risk-adjusted basis over three years and five years.

Institutional investors, such as pension funds, value risk-adjusted outperformance highly since it reflects volatility as well as net returns.

On an absolute basis, hedge funds returned 7.4% last year, according to the Preqin All-Strategies Hedge Fund index.

At the same time, AIMA and Preqin estimate that the net gain in the value of hedge fund assets in 2016 was $120bn.

That would be the value of investment profits net of all fees, were investors to withdraw their investments and crystallise those gains.

“We already know from the various indices such as Preqin that have reported their flash numbers this month that 2016 was one of the better years for hedge funds since the financial crisis,” said AIMA chief executive Jack Inglis.

“Even though the headline numbers may not have met all investors’ expectations, our analysis highlights the importance of explaining various strategies and timeframes for yielding returns to clients.

“Significantly, on average hedge funds outperform on the key metric of risk-adjusted returns over one year, three years and five years.”

Amy Bensted, head of hedge fund products at Preqin, added: “2016 could be characterised as a year of a series of unpredicted events. As markets responded to the unexpected events of 2016 hedge funds were able to show their worth and generate their best returns for three years.

“Investors, however, are looking for hedge funds to produce more than high returns; as this study shows hedge funds have delivered solid risk-adjusted returns over the short and longer terms, a facet of hedge funds that is highly prized among the institutional investors that Preqin works with.”