Amid a growing list of disasters, many are increasingly questioning the claims of hedge funds to offer absolute returns. In one corner is Simon Lack’s critique, which he lays out in his book, The Hedge Fund Mirage, and recently summarized at a recent CFA Institute conference. Lack argues that the hedge fund industry is guilty of misrepresenting their claims of performance. In another corner, new studies and approaches seem to support the performance claims of hedge funds, particularly the very largest and smallest.
It is undeniable that numerous frauds and blowups, unpopular restrictions on investor withdrawals, exorbitant fees, and embarrassingly weak performance have left former enthusiasts unimpressed. But in their place institutional portfolio managers seeking volatility-cutting alternatives to pricey bonds and unrewarding cash have made significant allocations to hedge funds, hoping for relative if not absolute returns.
In search of enlightenment, our team of CFA Digest abstractors evaluated recent research about hedge funds and alternative strategies for hedging.
- The Value of the Hedge Fund Industry to Investors, Markets, and the Broader Economy: Using data from a 17-year time period, this study finds that hedge fund returns have reasonably lower volatility when compared with other asset classes.
- Alternative Assets: Are They Still Worth It?: Alternative assets may not enjoy the alpha generation they previously did, but some alpha and diversifying power are still available.
- Selecting a Hedge Fund Replication Approach: Salvatore Bruno and Robert Whitelaw outline steps to select optimal attributes of a hedge fund replication approach.
- Hedge Fund Leverage: Changes in aggregate hedge fund leverage ran countercyclical to the leverage of listed investment banks and broker/dealers during the 2007–09 financial crisis.
- The Road Less Traveled: Strategy Distinctiveness and Hedge Fund Performance: Skilled hedge fund managers herd less than other managers and have unique strategies that deliver significant alpha.
- Do Hedge Funds Manage Their Reported Returns?: There is evidence that hedge funds engage in returns management by either underreporting returns during the year and adding them back in December or by borrowing from next January’s returns.
- The Effectiveness of Asset Classes in Hedging Risk: What is the relative effectiveness of other asset classes — US equities, foreign equities, US bonds, and T-bills — in hedging portfolio risks on a relative basis?
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