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The Search for Alpha: Investing in Newer Hedge Funds
Opalesque is following up a NY Times article that we covered last Friday “Study: Why emerging managers outperform” (see our archive).
Mayer and Hoffman now provided us with the original material.
From Sam Kirschner, Ph.D., Managing Director, Mayer & Hoffman Capital Advisors, LLC,
New York, NY
Matthew Hoffman, Chief Investment Officer, Mayer & Hoffman Capital Advisors, LLC, New York, NY
Ron Panzier, CFA, CPA, FRM, Chief Risk Officer, Mayer & Hoffman Capital Advisors, LLC, New York, NY
A slew of studies have concluded that newer hedge funds have outperformed their more seasoned peers. Table 1 summarizes three of these studies (Jen, Heasman & Boyatt, 2001; Tremont/Tass, 2000; HFR, 2000) with adjustments for survivor bias ranging from 2.9% in year one to 0.9% in year six of existence. The left side of Table 1 shows a 700 basis point advantage between funds in their first year vs. year seven. Note that volatility as measured by annualized standard deviation is relatively unchanged regardless of the fund’s year in business. On the right side of Table 1, the Sharpe ratio, a widely used measure of risk and reward, is presented for the period 1990-2000. From years one through seven, Sharpe ratios declined about 33% from 3.5 to 2.2, using a risk free rate of 5%. According to these studies, investing in newer hedge funds was clearly not only more rewarding but also less risky than investing in olde...................... To view our full article Click here
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