Sunday, April 21, 2013

Are hedge fund investors beginning to relaize returns are not that great?

In some recent papers, researchers argue that ...
In some recent papers, researchers argue that the return from an investment mainly results from exposure to systematic risk factors. Jaeger, L., Wagner, C., “Factor Modelling and Benchmarking of Hedge Funds: Can passive investments in hedge fund strategies deliver?”, Journal of Alternative Investments (Winter 2005) (Photo credit: Wikipedia)
First the "what": Investors are redeeming hedge funds, especially equity funds:

Hedge fund investor inflows turn negative in March - preference for credit strategies continues - Opalesque:

"After a seven month span of consistent positive flows ending November 2012, during which MBS focused funds took in an estimated $6.1 billion, the group has seen outflows in three of the last four months. Despite having net positive investor flow during this time frame, it is of interest that the group’s flows are no longer universally positive....Investors again were net redeemers of assets from directional equity strategies in March. Q1 marked the seventh consecutive quarter of redemptions from equity strategies, matching the duration of outflows the group endured during/after the financial crisis."

The "why" is unknown, but one possibility is that investors are starting to see that just because a fund has the word "hedge" in it, does not mean it is a great fund.  Indeed, it may be far from that great.

To wit:

Rob Arnott: Why I've had it with hedge funds - The Term Sheet: Fortune's deals blogTerm Sheet:

"Arnott's colleagues started with a portfolio with a basic mix -- 60% stocks and 40% bonds. They then took a look at what would happen if the portfolio was shifted gradually, 10% at a time, into hedge funds. The result: Returns went down, and risk went up as the exposure to hedge funds increased, which is the opposite of what you want.

"Portfolio efficiency didn't improve," says RA's John West, author of the firm's hedge fund study. "In fact, it deteriorates with each additional allocation to hedge funds."

Hedge funds did a little better over the past 15 years. But even over that period, West found that a pension fund would have done better by adding a passively managed mix of commodities, real estate, and other assets, rather than expensive hedge funds."

And yet money flows into hedge funds.  What is the allure?  Maybe Statman is right and it is just that people want to brag (appear rich) and investing in hedge funds does that!

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