BreakingViews on Hedge Fund Alpha

A little perspective on hedge funds from BreakingViews (emphasis added in bold):

Some investors might want hedge funds to return consistent, positive returns after fees -- the absolute return model. In reality, many of today's funds actually have plenty of market exposure, be it to stocks, bonds or other asset types. Compared with most of those markets, hedge funds haven't done so badly.

Of course, investors who handed money to a hedge fund rather than making what could have been a stunning 50%-odd return on oil won't be feeling too clever. But the Standard & Poor's 500 stock index, for instance, fell 13% in the first half. That makes the average hedge fund's tiny loss look like a decent performance.

Six turbulent months don't prove much. There are, though, a couple of messages. Any investors who still think hedge-fund returns are uncorrelated to major markets are wrong. Most funds' performance will be to some extent linked with market benchmarks.

Meanwhile, hedge-fund managers might note that, even if they handily outperform a weak stock market, their fee structure -- typically 2% of assets and 20% of any profit -- will start to look even more expensive if net returns hover around zero for long.

A couple points: Insofar as avoiding big losses is the single most important ingredient in long-term investment success, an average loss of 0.75% after expenses in the first half of the year is more than "decent." It's flat-out superb.

As we noted on Tuesday, manager performance is necessarily linked to market benchmarks, though to widely varying degrees. The key to alpha-seeking money management is to let skillful managers put their abilities (i.e., perspective, temperament, judgment) to work on the widest possible opportunity set.

Source

John Foley and Richard Beales, "InBev Courts the Tax Man," Wall Street Journal, July 10, 2008

Comments

[Randy Fay]

The ~0% average return for hedge funds return for the first 6 months of 2008 should be considered pretty darn good, considering what the market has done. IMO, RELATIVE performance is what matters, not ABSOLUTE.