Friday, June 09, 2006

Hedge managers can play, but do their funds really work?

The Who played at Woodstock, and according to this New York Times report, they were back on the job at Hedgestock, an alternative festival for wealthy fund stars and their vassals held north of London. Bentleys may have been more numerous than VWs.

Hedge fund stars lap up luxuries despite bad press about the results they achieve. According to The Times of London, last year hedge fund returns averaged anywhere from 3% to 9% or so, depending on the index one consulted.

What's more, as Ben Stein reported in a New York Times column, "research by Burton G. Malkiel, a professor at Princeton, and Atanu Saha, a principal at the Analysis Group, found that over long periods hedge funds significantly underperform index funds, like those based on the Standard & Poor's 500-stock index."

Stein adds, "Other commentators . . . say that even these results overstate hedge fund results. For one thing, there is survivorship bias — always a problem in the back alleys of finance — because only the hedge funds that survive report at all. If you take into account the ones that fail, the results would be worse."

But what about hedge funds that do so well they close their doors to new investors and stop reporting results? According to a Mark Hulbert column, a new study suggests that hedge fund returns would look better, and more persistant, if these overachieving dropouts were taken into account.

Or maybe not. Lacking hard data on the actual returns generated by closed-door funds, the study is based on "intelligent guesses."

1 comment:

JLM said...

Aha! They're not all Alpha Males. Lorrie Landis writes the WSJ (from Greenwich) to set the record straight:

"It appears that the writer of "Hedge-Fund Chic: A Pricey Casual Look Emerges in the Financial Hub of Greenwich" (Pursuits, June 3) didn't notice all the casually-chic women disembarking in Greenwich alongside their male counterparts.

"In fact, many in this fashionable female crowd, arriving in decidedly more imaginative sartorial splendor than what you have described, are the traders, research analysts, partners or even heads of these hedge funds."