Citigroup: Hedge funds a better structure for alpha generation than long-only funds
Feb 18th, 2007 | Filed under: Hedge Fund Industry Trends, Hedge Fund RegulationHedge Funds and The Active Management Industry
By: Neil Brown and Rui de Figueiredo, Citigroup Alternative Investments
Published: Winter 2007, Citigroup Alternative Investments Journal
Citigroup’s Neil Brown and Rui de Figueiredo see hedge funds not as a distinct asset class, but as a distinct governance structure - one that is ideally designed to generate alpha. As a result, they view the competition between hedge funds and traditional long-only funds as a “competition between governance structures”. And they are clear that hedge funds have an inherent structural advantage when it comes to creating alpha.
In a recent article for the Citigroup Alternative Investments Journal (via FT, via Opalesque), the two pose an interesting question:
“Why do the traditional governance structures exist at all? One answer may be that traditional (long-only) active managers care relatively less about alpha generation than hedge fund managers do. Before the emergence of more sophisticated financial instruments, many investors had no choice but to bundle alpha with beta.”
We here at AllAboutAlpha agree. We believe a loosening of the requirement to track a benchmark shifts control from the investor to the manager. Naturally, this requires re-writing the manager-investor compact. This new governance framework that results has many warts (including, for example, a lack of transparency, potential “style-drift”, and less frequent reporting). But it also enables manager skill (a.k.a. alpha) to freely bubbled to the surface.
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