Seekingalpha has a fascinating and short interview with Roger Ibbotson (”fascinating” and “short” seem to be highly correlated for me).
If you want to learn more about Ibbotson, read the intro to the article.
In case you don’t have time to read the whole interview, here are the highlights and money quotes:
- Because many hedge funds had (have?) a similar strategy, many hedge funds had to unlever at the same time in summer 2007, contributing to the meltdown “as they rushed to the same exits.”
- “In both cases, the quant funds that were able to stick with their strategies were able to quickly recover. But those who targeted volatility got whiplashed. Those who kept their leverage intact did reasonably well. Unfortunately, many investors lumped quant funds into one big category, and have become wary of the whole group.”
- “Investors often select funds with the highest returns, without tracing where the returns came from. Most hedge fund returns are actually associated with beta, rather than alpha….. they do not really provide alpha and can be replicated for less than typical hedge fund fees.”
- “The drop exposed the fact that many hedge funds are really not absolute return vehicles, but actually contain a lot of beta.”
- And the most interesting quote in the interview: “[H]edge fund alphas are still positive, although not as high or significant as before…. [T]he majority of the returns can be classified as beta, then fees, then net alpha, in that order. Despite the fact that alpha makes up the minority of the return, it is still noteworthy that the net alphas are positive. This is in contrast to the mutual fund industry where there is little evidence of aggregate positive alpha, even on a gross level. On a net level, aggregate mutual fund alpha is usually negative.”
The last quote is interesting for a few reasons. First, it shows that hedge funds are not about “hedging,” as most of their returns is beta.
Second, it contradicts another study I’ve seen that concluded the hedge fund industry has net negative alpha. Unfortunately I didn’t save a link to the study. If I come across it I’ll post it.
Third and most intersting, it’s more ammo that mutual funds in general are bad investments. There’s too much to say about this topic. I’ll save it for a future post, or series of posts.