Alpha dogs of the hedge fund industry found to have taste for beta

Nov 9th, 2010 | Filed under: Hedge Fund Industry Trends, Today's Post | By:
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Early last week, we told you about an annual study of the performance of young vs. “tenured” hedge funds and of small vs. large hedge funds.  The data provider Pertrac found that, in keeping with previous years, the young bucks post higher returns than their tenured cousins and that the small funds beat the large funds.  But what about alpha?  The study did not identify whether much – or any – of that relative out performance was alpha.  Young and small funds might have simply been more levered to equity markets.  After all, why wouldn’t they?  The only way to attract investor attention is often to post eye-popping returns. If the market flounders, well, it was worth a try…

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  1. There are two possible reasons for emerging managers performing apparently better than established managers. First, depending on how the return is reported, the return to emerging managers could be entirely backfilled. That is, an emerging manager would start reporting his return to a public database only if the history is good. Therefore, it is not clear whether the history of an emerging manager represents a truly investable product. Further, given the fact that there is a significant time lag in the allocation process (e.g., returns are not typically known for about a month and it takes a few months to perform DD and so on), one may wonder if returns to emerging managers are similar to proforma returns from countless high alpha products who turn out to be just average when actual money is allocated to them. Second, since the attrition rate among emerging managers is much higher, survivorship bias significantly exaggerates returns to emerging managers. All of those losses to emerging managers who went out of business have to be taken into account.

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