Funds have failed to deliver meaningful Alpha since the Great Financial Crisis.

Hedge fund performance hasn’t lived up to the hype over the last ten years. This, according to the Executive Director of the Richard A. Mayo Center for Asset Management, University of Virginia Darden School of Business.

In a recent paper, Rodney Sullivan examined hedge fund returns since the Great Financial Crisis. He found that hedge funds delivered Alpha of -0.8% over the last ten years.

That figure represents a marked decline for the 3.4% level that hedge funds had delivered in the prior 15 years. This is just the latest example of an asset class becoming so popular as a result of high performance that the flood of money chased out excess returns.

The study titled “Hedge Fund Alpha: Cycle or Sunset?” also suggested that the lack of Alpha was the result of less active risk-taking by hedge fund managers.

Hedge Fund Performance and Career Risk

This is a fantastic example of career risk at work. Once a hedge fund gets beyond the start-up phase, most of the money it needs to raise comes from portfolio allocators at major endowments, pension funds, and funds of funds. The best way to raise and keep the money is not to look too different from everyone else. The best way not to get fired is to closely mimic the relevant benchmark, which in most cases, is the S&P 500.

Each quarter I routinely review hundreds of 13F filings by money managers and have observed that potentially billions of dollars of management and even incentive fees are being paid to managers whose portfolios closely resemble the makeup of the S&P 500. Mangers’ reluctance to take career risk is potentially costing investors to miss out on unfathomable amounts of profits and pay billions more in unnecessary fees.

By: Tim Melvin

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