Hedge fund managers used to be the upper echelons of the investing world. They were the men (and women) that were most quoted, most talked about and most followed, but things may be changing. Hedge fund performance has not been nearly as strong lately as it once was. Even legendary hedge fund managers like John Paulson have been producing less than impressive returns. Research has even suggested that a monkey may be better at picking successful hedge funds than funds of funds. So, where is hedge fund alpha?
New Hedge Fund Research Suggests Hedge Fund Alpha at 5 Basis Points
The Financial Times reports the hedge fund industry at large delivers risk-adjusted returns of essentially zero according to new research conducted by three academics – Christopher Clifford, Adam Aiken and Jesse Ellis. They concluded, “The average excess return of hedge funds does not differ markedly from zero. The implications of this result are large.” Whereas previous research suggested that the typical hedge fund delivered 3-5 percentage points over risk-adjusted returns, or “alpha,” the research of this trio pegs the number closer to 5 basis points. Clifford, who is an assistant professor of finance at the University of Kentucky, says, “Most of the research on mutual funds has not found alpha on average, while that on hedge funds has, and it has been a bit of a puzzle why. We don’t find the average hedge fund has any alpha.”
The Issue of Hedge Funds Reporting Performance
One glaring issue in any hedge fund research is the fact that many, if not most, hedge funds do not report their data to industry databases or make their performance public in general. “Messrs Clifford, Aiken and Ellis attempted to get around this by analysing the holdings and returns of funds of hedge funds registered with the US Securities and Exchange Commission between 2004 and 2009, which identified 1,445 separate hedge funds,” reported the Financial Times. “Of those funds, those that reported their returns to commercial databases produced average alpha of 92 basis points a quarter, in line with the 3-5 per cent annual return commonly cited. However, when the returns of funds that do not report to databases are factored in, the average falls to just 5bps.”