The quest for alpha — above-market returns — is the essence of the hedge fund industry, so this factoid from the weekend Barron’s is illuminating:
David A. Hsieh, (pronounced Shay), a finance professor at the Fuqua School of Business at Duke University, estimates that the $1 trillion hedge-fund industry is chasing a mere $30 billion in alpha per year. That’s precious little to support the hefty fee-generating machinery, ostensibly developed to scoop up excess return.
“My comment…was that if there’s $30 billion of market inefficiency, in a world of $30 trillion of equities and
bonds, then we have about 0.1% inefficiency — less than the typical bid-ask spread!”
And what do hedgies think about this? They entertainingly deny, deny, deny, of course:
“Academics often have a more textbook approach than experienced practitioners and those estimates make for good cocktail talk,” says Alain DeCoster, founder of ABS Investment Management, a fund of funds based in Greenwich, Conn.
“If what he said were true, then investors would have been leaving hedge funds, not piling in, as they have for the last five years. Investors go to hedge funds in search of better risk management and greater talent.”
Right, because we all know that investors are entirely rational in the short run and never fall for bandwagon effects or the next hot thing.