If you click thru to the index provider the methodology is "available upon request". The idea of an equity quant index does sound suspect. Are we talking about factors, tactical, systematic, market-neutral, etc? It's a lazy article. (FWIW, one of my many past jobs was a HFOF investor - specializing in equities.)
What are possible reasons behind Quant Funds underperforming for past 5 years?
- Thread starter helpme_please
- Start date
I did not read the linked article at all and did not refer to it I referred to the fact that most hedge funds today are extremely highly correlated with the broad market which makes the term hedge a misnomer.
There's some truth in what you're saying. Let's see if we can unpack the ideas. The largest component of the HF universe is L/S equity. The hedge ratio used by a L/S equity fund is a random variable. When markets are trending up strongly they reduce their hedge ratio to capture more beta. Typically, L/S has a net exposure of 0% to 40%. Given the current market trend many are probably running close to +40, hence, your point about being highly correlated at the moment. As an aside, the typical L/S short portfolio is a blend of ETFs or shadow indexing.
It is easier to just compare the return profile of a broad market profile with the return profile of the hedge funds. Obviously, one would have to do this on a longer-term basis as short term return profiles for hedge funds are not publicly available. It is pretty easy to see that the two return profiles correlate highly. If most hedge funds truly went aggressively short the correlation with the broad market would be a lot lower which it is not.
A low correlation with US equities isn't a necessary condition for a HF portfolio. Unless the stated objective of a HF is equity market neutral I'd expect HFs to harvest equity market beta (within the fund mandate), just like any other beta.
Last edited:
Disagree. Hedge funds don't get paid for beta. They get paid to generate alpha. And that is not correlated with the broad market. That most hedge funds do not meet their mandate shows with their underperforming broad based indexes.
I guess we'll agree to disagree. I've invested $ hundreds of millions in HFs. I've interviewed the managers of countless HFs and analyzed their daily returns, prime brokerage risk reports, audited financials, etc. I feel pretty comfortable with my knowledge of the space.
Last edited:
Saying one knows something about something does not add much value to an exchange. What value do I add to my assertion when I tell you that I worked as sell side and prop trader for a little less than 20 years at large banks and hedge funds? Nothing. What makes you think anyone gets paid for beta?
This makes the point better than I have time to describe:
http://www.investmentreview.com/files/2009/12/AIC_clermont4.pdf
This one also make some good points:
https://investresolve.com/stop-paying-for-active-management-beta/
This makes the point better than I have time to describe:
http://www.investmentreview.com/files/2009/12/AIC_clermont4.pdf
This one also make some good points:
https://investresolve.com/stop-paying-for-active-management-beta/
DiceAreCast: "What makes you think anyone gets paid for beta?"
bluelou: I'm not really sure why you want to make this argument when you've already argued that HFs are getting paid for beta. Consider your own statements and the link you cited. I can help explain if it isn't clear how hedge funds make money and the attribution among beta and alpha.
DiceAreCast: "What you call hedge funds and quant funds are today by large majority long only funds."
DiceAreCast: "This makes the point better than I have time to describe:"
From the 2nd paragraph of your first link:
"An analysis of the returns of hedge fund strategies shows that most are not market neutral, that is, they are not pure alpha strategies. Over the 1994-2000 period, the aggregate hedge fund index had a market exposure (beta) of 0.37. Thus, on average, a significant portion of hedge fund managers’ returns came from market exposure. Some strategies, such as emerging market hedge funds, had a much higher beta of 0.74."