Last year I had a book about hedge funds thrown in the back seat of my car during a long car trip, and a friend of mine (named Fish) was bored enough to read a good portion of it. He’s a physics PhD student so he tends to understand everything. It’s a pretty academic book with graphs on every third page and seems about as legitimate as books get on the subject (It’s used for the CAIA exam). Plus, the author is the Chief Information Officer of CalPERS - the California Public Employees Retirement Service - and has about 50% of the alphabet coming after his name: Mark J. P. Anson, J.D., PhD, M. Fin, CFA, CPA, CAIA, CIA.
Basically, Fish’s reaction was this:
Honestly, I tend to agree with him. I’d really love to believe the hype, but the data sets out there are spotty at best and plagued with survivalship and self-selection bias. It’s difficult if not impossible to identify a subset of funds that actually do consistently outperform risk-adjusted market benchmarks after fees, if they even exist. Dr. Anson’s book rather sagely leaves out any specific fund names.
The idea is simple - hedge funds are private, specialized investment companies with experts that pursue stocks and companies with above-average market returns (”alpha”) in specific fields. These managers are more skilled than the rest of the market in their specialties, so they’re able to spot inefficiencies others can’t. Hedge funds, therefore, become a useful part of portfolios of wealthy investors who understand their risks and can choose among funds from all sorts of classes - from general long/short stock-pickers to statistical arbitrage to merger speculators. The web’s best (or at least one of the more vocal) hedge fund apologist blog is here, if you’re hankering for a sip of the Kool-Aid.
Unfortunately, I really think the verdict’s still out until I see a good model with a solid, unbiased time series, but I’m inclined to say that most probably don’t justify their fees. A fund that consistently beats their risk-adjusted benchmarks may be out there (SAC Capital, perhaps?) but as an individual investor I don’t have the resources to do the research I’d need to convince myself that one can separate the ‘Alpha’ from the ‘Schmalpha’ (thank the dour Nouriel Roubini for that portmandeau). Until I do, I’ll stick to index funds.
Post a Comment