How Many Hedge Funds Beat the Market After Fees?
Harry Kay featured in this New Yorker article provides some answers:
Kat followed through on his hedge fund skepticism by conducting two hedge fund related studies. The first, published in the June 2003 Journal of Financial and Quantitative Analysis, looked at the fee-adjusted returns of 77 funds from 1990-2000 in relation to returns generated by market benchmarks with similar risk profiles. The result – 72 of 77 funds failed to outperform the benchmark.
The second, posted online as a working paper in 2006, looked at more than 1,900 funds and generated a similar result. Only 18% of funds beat the designated benchmark, and the most successful funds had declining returns over time. The after-fee alpha was negative in the vast majority of cases.
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Posted: June 27th, 2007 under General, hedge funds.
Comments: 1
Comments
Comment from Jason Ruspini
Time: June 27, 2007, 3:51 pm
While many managers do charge alpha prices (fees) for mere beta, Kat’s methodology is controversial. Specifically, here I think the “benchmark” referred to is not a public index, but a “distributional” clone of Kat’s creation. Kat chooses a basket of assets and then hedges them on a daily basis to produce returns targeting the volatility, skew, kurtosis and correlation to some third asset. He doesn’t target mean return (what investors care most about) but the mean return is dependent on his basket of assets, which he doesn’t tell us about.. so he is possibly overfitting here, i.e. his clone might not perform as well going forward.
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