click for larger graphic
Hat tip Bianco Research
The chart above raises a very interesting question: Why are hedge funds underperforming this year? In general, the answer would involve costly fees, and no Alpha creation — but what is it about this year that is so problematic?
A few theories have been trotted out:
• Excess Correlation
• Lack of clear trend
• Federal Reserve Intervention
I doubt any of these are the answer — I think there are two primary possibilities:
1) Managers have been excessively timid this year. (I am not sure why given Fed guarantees of ongoing liquidity).
2) Nassim Taleb’s suggestion that the Alpha that most managers create is the result of dumb luck, and not skill.
Between those two possibilities, I am leaning towards Taleb’s explanation . . .
Friends and colleagues who run hedge funds all understand I am not referring to them.