E.M.H. R.I.P. W.T.F?
In an ironic twist, the Economist suggests that financial engineering (and by extension the hedge funds built with its outputs) are built on the shoulders of the efficient market hypothesis. Yet the much ballyhooed demise of the EMH should, in theory, pave the way for skill-based, alpha-centric returns. In fact, the newspaper even makes the case for hedge funds in this weeks edition:
“…In 1980 Sanford Grossman and Joseph Stiglitz, another subsequent winner of a Nobel prize, pointed out a paradox. If prices reflect all information, then there is no gain from going to the trouble of gathering it, so no one will. A little inefficiency is necessary to give informed investors an incentive to drive prices towards efficiency…”
Confirmation that fund of funds investment is a trailing indicator
Hedge Funds Review reports on S&P’s latest fund of funds asset flow data, observing that “…Investors quick to respond to disappointing returns have been much slower to react to improving performance.”
Is new 130/30 ETF active or passive?
While it’s originators, Andrew Lo and Pankaj Patel call it a “passive” strategy, the model upon which the new Proshares 130/30 ETF is built looks a lot different that a typical passive index. Says Lo: “The quantitative model behind our 130/30 Large-Cap index is based on extensive, robust research on the real-world factors contributing to stock performance.”
(btw,did you know Lo’s first science project was to make a battery out of a lemon. Amazing but true.)
When is a rebound not actually a rebound?
Although it seems that the hedge fund industry has rebounded (“Hedge fund redemptions mostly over: Goldman CFO“, “Non-U.S. institutions have opportunity and motive to return to hedge funds“, “Cerulli Estimates Hedge Funds to Grow Faster than Mutual Funds“, or this by Reuters: “The rebound became visible in April…“), Wealth Bulletin reports that a “rebound” doesn’t actually occur until assets break through their all time highs…”Hedge funds unlikely to rebound before 2014”
At the intersection of transparency and secrecy
Hedge fund secrecy is nothing new. But when hedge fund managers issue public securities that M.O. comes in conflict with the expectation that investors should be privy to all material information about the manager. And nothing is more material than the expected performance fees.
“Social Market Hypothesis”
AllAboutAlpha.com contributor Denise Shull views the world through a human lens and proposes a version of the adaptive markets hypothesis in the Summer edition of the CME’s eponymous quarterly magazine.
Clones on the come back
The FT reports last week that: “Pioneers of hedge fund replication are reporting rising interest as investors consider returning to the asset class but remain wary of the underlying industry’s poor record on liquidity and transparency and its sky-high fees.”
Buying the Farm
We’re in Saskatchewan this week. (Google it if you’re not into potash, oil, natural gas, uranium, agriculture, or making money). So after gazing out across wheat and canola fields as far as the eye can see, we were interested to see this article in IPE (free registration req’d) last week about agricultural land as an “alternative” investment. In a place proud of its quirks (example), “alternative” and “investment” have a nice ring in a place where – believe it or not – auto sales and real estate prices have both gone up recently.
Addendum (11:30am ET): 2007 white paper “The Role of U.S. Farmland in Real Estate Portfolios”
Asian Investor reports on a triple conundra hitting hedge funds this year. It seems that the only escape may be the hedge fund equivalent of the mythical “Triple Lindy” made famous by comedian Rodney Dangerfield.
Time to let go?
Finally, the Wall Street Journal questions lingering redemption gates, saying, “Fund managers argued that last year’s clampdown was necessary to protect remaining investors from the unloading of hard-to-sell assets at fire-sale prices. Six months later, things look a lot different…”