As a follow-up to our posting yesterday on the folly of going on a fishing expedition to find common risk factors, here’s a great example of an apparent beta factor that may (or may not) indicate some underlying return driver.

According to this story in Chicago Business, hedge funds based in the Windy City were up 7.45% in Q3 vs. only 2.44% for the rest of the industry.  What can one possibly conclude other than the fact that Chicago hedge fund managers are smarter than the rest of us?  Well, maybe that such returns are demanded since Chicago hedge funds are riskier than the rest of us?  Or that, just maybe, it was a statistical fluke?

The point is that many hedge fund investors are return-chasers.  They will pile into merger arb strategies after a couple of good months, or re-allocate to distressed when it beats credit over a quarter.

So return-chasers, why not dump your current funds and re-allocate to Chicago?  Why not?  Because that’s a goofy idea, that’s why.  About as goofy as return-chasing itself really.