The percentage for hedge fund managers who are beating the market on skill is getting smaller and smaller. Read this interesting analysis by Barry Ritholtz.
If You’re Such a Great Investor, Where’s Your Alpha?
By Barry Ritholtz from Bloomberg.com
Is alpha, the Wall Street term for market – beating returns, sustainable? Or is it a unique, statistical outlier, indistinguishable from random chance?
I have been thinking about this a lot, lately. The relentless drumbeat of negativity about hedge funds, of which I am admittedly a contributor , is the underlying motivation for this line of thought. It has sent me on a hunt for those managers w ho consistently create alpha.
They are few and far between. You likely know their names. There is a short list of those who have 1) outperformed; 2) over long periods of time, and; 3) manage substantial sums of money. It’s impressive if you are on that lis t, but discouraging if you seek to invest institutional capital with this group.
This isn’t a secret. Jim Chanos of Kynikos Associates pointed out that 30 years ago there were only about 100 hedge funds and just about all of them created alpha. Today, there are more than 10,000 hedge funds, and it still seems as if only about 100 of them generate alpha.
It isn’t just hedge – fund managers; stock pickers in general (hedge funds, mutual funds, pension funds, etc.) have been having a hard time of it. This is the “ Paradox of Skill .” As more and more talented people enter the investment field, there is simply that much less alpha to go around. Financial researcher Larry Swedroe notes that only 2 percent of managers are generating alpha, down from 20 percent a few decades ago. That number seemed likely to keep failing.
Gene Thomas Offredi, CFP®, RFC™ is the founder of Guilford, Connecticut’s Summit Investor Coach, LLC. Contact Gene on the web or by phone at 203.453.1017. Summit Investor Coach, LLC is a Registered Investment Advisor.