ebook essays pieces of the puzzle
Tuesday, October 9th, 2012
enormous unraveling

Is the hedge fund business set up for an “enormous unraveling”?

That question was asked in the headline of a recent CNBC NetNet posting.  The money quote came from James Altucher, who warned of a tough start to 2013 as funds faced withdrawals at the end of this year.

In the asset management business, three years is often the point at which managers feel that they can market a record — or clients think that they have enough evidence to make judgments about a manager’s ability to add alpha.

But the crowded hedge fund space has led to crowded trades and a crowding out of the type of performance that most investors expected to receive.

The battle over alpha has also engendered a battle over the availability of alpha, with the industry and its skeptics tossing performance studies back and forth.

While that battle rages on, here’s a simple chart that’s just short of that magic three years, comparing three Bloomberg hedge fund indexes with benchmarks that they’d be expected to beat.  From the top:  long equity versus the S&P 500, market neutral versus a one-year T-bill, and fixed income versus AGG.

Not a pretty picture.  (Chart:  Bloomberg terminal.)