6 Things You Didn’t Know About Hedge Funds

4.  Why do we observe a negative trend in hedge fund alpha over the last decade? We haven’t seen anyone provide a satisfactory answer that’s supported by cold hard data. We have quarterly 13F filings of almost all hedge funds. These filings show each hedge fund’s long equity positions in US stocks at the end of each quarter. Our analysis has shown that hedge funds have been increasingly investing in large-cap stocks as they attract more and more assets from dumb pension funds (yea, we call them dumb because they don’t try to do the right thing; they do the safe thing to keep their jobs). Our research has shown that hedge funds’ most concentrated stock positions in large-cap US equities outperformed the market by less than 2 percentage points per year BEFORE fees. Remember, hedge funds charge 2% in management fees and another 2% in performance fees (assuming their average return is 10%). So, hedge fund managers took advantage of their dumb investors by investing in large-cap stocks. They probably know that they can’t generate enough alpha in large-cap stocks but the hedge fund industry is now managing close to $3 trillion today. They have no other choice; they have to invest this influx of capital into large-cap stocks.