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Alternative Market Briefing

Commonfund paper looks at how equity rally has impacted manager selection

Thursday, August 28, 2014

Bailey McCann, Opalesque New York:

A new paper from Commonfund examines how the prolonged rally in equity markets could be impacting manager selection as it becomes harder to separate luck from skill in a portfolio. "Chasing Winners: the Appeal and the Risk" is authored by members of its Hedge Fund Strategies Group, Kristofer Kwait, Managing Director, Head of Hedge Fund Research, and John Delano, Director.

The paper shows that many hedge fund managers have benefited from outsized gains due to the extended broad market rise. Investors are often influenced strongly to select those hedge fund managers that have produced outsized recent performance. However, this strategy can work against investors in the long run since it is implicitly based on the manager’s ability to track market movements across investment environments -- even though evidence for this ability within the manager universe is not robust. This strategy also discounts alpha, which evidence suggests is a better measure for producing long-run results.

Data in the paper cautions investors away from chasing winners, as over the long term performance is not assured and is often attributable to specific market conditions over any real skill. Additionally, experiment results also suggest that alpha – in this case, return not accounted for by beta to the broad equity market, in......................

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