No triple alpha for hedge funds, just a gentleman’s third

[abattia]

https://www.oxfordtoday.ox.ac.uk/hedge/

... 40 per cent of hedge funds mislead investors by routinely revising historic performance data...

... self-selection bias, namely the practice of withdrawing poorly performing funds from the voluntary datasets... By returning these ‘dead’ funds to the datasets, [...] the reputation of the hedge fund industry for delivering superior risk-adjusted performance for their investors is a myth... after fees, hedge funds deliver risk-adjusted returns of essentially zero.

 

[intradaybill]

Quote from abattia:

https://www.oxfordtoday.ox.ac.uk/hedge/

... 40 per cent of hedge funds mislead investors by routinely revising historic performance data...

... self-selection bias, namely the practice of withdrawing poorly performing funds from the voluntary datasets... By returning these ‘dead’ funds to the datasets, [...] the reputation of the hedge fund industry for delivering superior risk-adjusted performance for their investors is a myth... after fees, hedge funds deliver risk-adjusted returns of essentially zero.

Why do you pay attention to journalists? They are losers. According to the same reasoning, someone who invested in AAPL last year did not make a huge return but actually nothing because stocks did not do well.

 

[trade2live]

I think there is a big misunderstanding about hedge fund investing. It's something obvious to traders but not to academics , portfolio managers etc.
It's self evident , all hedge funds are not created equal,
And the question of whether investing in hedge funds as a group adds value is the wrong question to ask in the first place.
What matters is not the strategy but the manager. Behind all of these studies is the old ivory tower idea of efficient markets pitted against the reality that it is possible to outperform markets even on a risk adjusted basis (producing true alpha) for a long time (ex. Soros , Renaissance etc.) .

Hedge funds are great if you can pick the best and have access to those few exceptional managers (both are very hard).
Of course the best funds are closed.
Hedge fund investing via an index or a large basket of funds via FoF for ex. does not add a great deal of value if any to a portfolio, costs eat up a lot of the return.

The HFRI investable hedge fund index (comprising the funds still open) has underperformed the HFRI index of funds that are closed.

Bottom line: investing in a hedge fund and hedge fund strategies is one of the best investments you can make if you are the manager or are one of the privileged few who are able to invest directly in the cream of the crop. For pretty much everybody else, hedge funds may disappoint and the majority of FoF do disappoint .

 

[sle]

This study proves (yet another time) that some people should not be allowed into a library unattended.

First of all, taking the whole hedge fund universe is stupid. Even my pet raccoon could register his own LLC and call it hedge fund. They should have thresholded it on both AUM and years in the business (e.g. exclude funds younger then 2 years). They should have also selected funds that are being audited by a grown-up accounting firm. But that would not make for such an interesting paper.

Second of all, dropping non-performers is a pretty standart practice for all indices. For example, S&P does not include bancrupt companies. As long as performance is recorded in the index up to the point where it's dropped (making it replicable, like S&P500 for stocks or HFRX for hedge funds), there is nothing bad about it. Looking at such indices actually gives you a reasonable idea of the risk-adjusted performance. Looking at the voluntary datasets is plain stupid.

I have a lot of problem with the hedge fund industry, but (just like with the adjacent thread about compensation) making sensational claims only masks the real problem.

 

[macroman]

hedge funds only prosper because of insider knowledge. Remove this and in aggregate will lose 3-4% pa.

Who wins ?

Commercials, insiders.

so classic idea is for someone with insider knowldge to invest in HF and remove legal issues. See soros using hendrey for 2008 thing. else he could be prosecuted.

 

[4thaugust1932]

Legalize insider trading.
With the proliferation of internet/cellphones/print/electronic media it's impossible to prevent insider trading.