Man Group CEO on lock-ups and alpha…
Dec 5th, 2007 | Filed under: CAPM / Alpha TheoryWith considerable debate ranging about Ranjan Bhaduri’s “Balls in the Hat” game (see related posting), Peter Clarke, the CEO of behemoth hedge fund manager Man Group apparently told a conference audience today that hedge fund lock-ups will bring institutions more alpha. This, according to Thomson Investment Management News.
This might surprise players of the balls-in-the-hat game because while lock-ups do bring more returns (ceteris paribus), it’s not likely “alpha”. Instead, it’s more likley just a fair market compensation for locking yourself up and throwing away they key.
In fact, Clarke didn’t actually say lock-ups “will bring institutions more alpha”. According to Thomson, he actually said:
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Longer lock-ups will most likely give *investors* in these funds a better long-term return, even if the behavior of the funds is no different, because the long lock-ups will force many of these investors to ride out drawdowns, instead of selling at the bottom in fear (and looking for someplace with hotter returns to chase).
Unless, for some reason, you believe that accredited retail investors somehow got a little “box o’ maturity” that keeps them from behaving like their non-accredited, mutual-fund investing cousins.
Bill,
Actually many studies have shown that hedge fund returns tend to be auto-correlated. Meaning good funds tend to do well and continue to do well, whereas a bad fund will tend to continue lower until it closes its doors. So are you telling me that an investor should stay in a losing fund, hoping that it will turn around? I think not.
Simply giving the investor a line of credit, at LIBOR+, if he wishes to withdraw should be sufficient. to satisfy both liquidity and lockup desires.
@ Autocorrelation Aficionado:
http://www.cxoadvisory.com/blog/external/blog1-24-08/
“In summary, presumably sophisticated hedge fund investors as a group chase past returns and fail to time their investments successfully.”