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Alternative Market Briefing

0% to 20% hedge fund managers produce alpha, depending on strategy

Wednesday, May 25, 2011

amb
Olivier Scaillet
Benedicte Gravrand, Opalesque Geneva:

According to some Swiss researchers, only a small proportion of hedge fund managers can and do produce alpha – and the majority simply ride the markets. That also depends on each strategy, and whether they are applied authentically or not.

On 1st May 2008, Laurent Barras of the Imperial College London, Olivier Scaillet of the University of Geneva and Russ R. Wermers of the University of Maryland published a paper called "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas." This paper used a new approach to determine the fraction of truly skilled managers among the universe of U.S. domestic-equity mutual funds over the 1975 to 2006 period. The technique accounted for "false discoveries" (luck) to separate actively managed funds into those having (1) unskilled, (2) zero-alpha, and (3) skilled fund managers. The researchers found that 75% of funds "pick stocks well enough to cover their trading costs and other expenses, producing a zero alpha." They also found a good proportion of skilled (positive alpha) funds prior to 1995, but almost none by 2006, accompanied by a large increase in unskilled (negative alpha) fund managers, due both to a large reduction in the proportion of fund managers with stock-picking skills and to expenses exceeding managers’ value.

According to Swiss daily Le Temps, one of these rese......................

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