Sarah Ketterer’s Of Causeway Capital Asks – ‘What Happened To Hedge Fund Alpha?’
American economist and Nobel laureate, Eugene Fama, would make a tough client. But we understand his skepticism. He once admitted, “I don’t believe anyone wants to hear what I have to say.” Maybe investors will tune us out as well, but the message is worth delivering. Performance deconstruction can reveal much about manager skill. We focus on the elusive “alpha” component of the investment return, which is not derived from beta (a measure of an asset’s sensitivity to market movements) or common factor risks. Alpha matters because it captures the portion of returns that moves independently of stock market cycles. Why pay hedge fund fees for beta and common factor returns when they are available for very low passive management fees? Investors tell us they seek diversification and want alpha uncorrelated with financial markets. They expect capital preservation in down markets, and aim for returns that do not depend on any particular economic environment. These all-weather funds are increasingly hard to find. Opaque attribution of hedge fund returns has added to some of the confusion surrounding the asset class.
To de-mystify hedge fund returns, we spoke to Causeway portfolio managers Arjun Jayaraman, Duff Kuhnert and Joe Gubler. As the architects of Causeway’s Global Absolute Return (GAR) strategy, they understand the importance of embedding diversification into a portfolio strategy.
Arjun, what are some of the major misconceptions you believe that investors have regarding hedge funds?
AJ: Rising stock markets mask the inner workings of many types of hedge funds. A true alpha fund would be able to deliver positive returns in a variety of market and economic environments (or regimes), not just in bull markets. However, we have observed a decline in the amount of alpha generated by hedge funds over the past decade, adjusted for common factor risks such as beta, size/capitalization, value and momentum.
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