One reason for that is the adverse selection problem. Not generating any alpha doesn’t mean that hedge fund managers are losing their stock picking abilities. Hedge funds are becoming like mutual funds. This should be alarming for hedge fund investors. Some of most recent studies even claim that the average hedge fund today doesn’t have any alpha.Ģ.
So it isn’t surprising that hedge funds’ alpha has been on a declining trajectory for the last decade. They also allocated a higher percentage of their portfolio to larger-cap stocks which are relatively more efficiently priced. Returns in a hedge fund’s 35th best idea won’t usually return as much as the hedge fund’s top five ideas. As hedge funds’ assets began to swell, they started to invest in “ideas” that they’re less comfortable with. This success attracted more and more funds from investors who didn’t want to be left out. Historically hedge funds delivered high alpha, especially when compared to the mutual funds and index funds. So why is there such a huge difference between actual hedge fund returns and the performance of their best ideas?ġ. a gain of 22.8% for SPY during the same period. This means investors could have generated an alpha of 46.8 percentage points by shorting our “battleground short stocks” instead of the S&P 500 Index. We have been tracking the returns of our battleground short stocks since February 2017. a gain of 60.4% for SPY ( see the details as well as back test results here). Our best performing hedge funds strategy which identifies the consensus small-cap picks of all hedge fund managers returned 78.4% since its inception in May 2014, vs. Does this mean that hedge fund managers are dumb as a rock when it comes to picking stocks?
Equity hedge funds have also been underperforming the market during the first 11 months of 2018.