Hedge Funds

sle · Feb 23, 2017

I think risk premium and market efficiency are orthogonal to each other. For example, a market could be inefficient without any real risk premium (for a variety of reasons - best example is real estate, highly inefficient market, yet it has very little risk premium). The opposite can exist too - you can have highly efficient markets with huge risk premiums such (e.g biotechnology event vol)

Harvesting risk premium is different from harvesting alpha. For the former, all you need to be in a different spot on utility curve and voilà. For the latter, you need skills and infrastructure.

Maverick74 · Feb 23, 2017

sle said:
I think risk premium and market efficiency are orthogonal to each other. For example, a market could be inefficient without any real risk premium (for a variety of reasons - best example is real estate, highly inefficient market, yet it has very little risk premium). The opposite can exist too - you can have highly efficient markets with huge risk premiums such (e.g biotechnology event vol)

Harvesting risk premium is different from harvesting alpha. For the former, all you need to be in a different spot on utility curve and voilà. For the latter, you need skills and infrastructure.

I disagree with that. Sure, you can harvest risk premium by simply showing up. But if you don't price it effectively, sooner or later, it will blow you out. Ask anyone who trades electricity.

sle · Feb 23, 2017

Maverick74 said:
I disagree with that. Sure, you can harvest risk premium by simply showing up. But if you don't price it effectively, sooner or later, it will blow you out. Ask anyone who trades electricity.

That's true about any risk premium, but it could be as simple as not being greedy (a.k.a. controlling the size). The whole risk premium vs alpha is not really relevant to the main discussion which is "hedge funds, as an industry, suck".

Maverick74 · Feb 23, 2017

sle said:
That's true about any risk premium, but it could be as simple as not being greedy (a.k.a. controlling the size). The whole risk premium vs alpha is not really relevant to the main discussion which is "hedge funds, as an industry, suck".

Well, with 10k hedge funds out there, the problem of adverse selection will put most at a disadvantage. This is true of most large industries where the product offered is opaque, especially one like the hedge fund industry where charlatans can disguise themselves well.