Cliff Asness: The Hedgie Inwards Winter

From AQR's Cliff's Perspective, May 31, 2018:
Cliff Asness

Once again, I volition review why hedge fund returns shouldn’t last compared to 100% long equities in addition to how to create a to a greater extent than proper comparison. Analysts in addition to authors oftentimes compare hedge fund returns to 100% equities (most often, the S&P 500). Then, almost e'er based on the end ix years since the global fiscal crisis (GFC) lows, they declare hedge funds an epic disaster. That’s exactly flat-out wrong. Comparing hedge funds to 100% equities would last a bad comparing at whatever time. To brand things worse, this comparing is done over a cherry-picked fourth dimension period. So this i has it all! An e'er fallacious comparing conducted over a especially extreme menstruum for that e'er fallacious comparison.

While I’m harshly critical of the inwards a higher house ubiquitous, but broken, comparison, I for sure don’t rescue hedge fund surgical operation since the GFC. Not close. Actually, I demonstrate that doing the comparing correctly, hedge funds bring petered out inwards the end 3rd to one-half of my sample, adding piddling to no value. “Petering out” agency non adding or subtracting much value. This is far less extreme than the usually reported epic disaster of hedge funds destroying many billions of dollars of their clients’ money, which follows from the aforementioned fallacious comparison. But it’s withal non really good. I larn on to seek to figure out why, if non exactly a random occurrence which is e'er possible, this “petering” has occurred.

I compare hedge fund returns amongst the returns from traditional long-only stock-picking. I scrap that much of the “petering out” of hedge funds inwards the end 3rd of our sample is probable due to hedge funds transforming from something by in addition to large dissimilar from traditional stock picking (from tell the early on 1990s to the early on 2000s – in addition to probable fifty-fifty to a greater extent than truthful before inwards time, but unfortunately nosotros don’t bring reliable information much earlier) to something far closer to traditional active mutual funds (early 2000s to now) … but amongst higher fees. 1
 
Much of the “right” way to critique hedge funds I study hither is solid soil I’ve covered before. That is, nosotros must compare hedge funds to the right beta (not 1.0) and, perhaps, conform for other well-known constituent exposures. But utilization is new, critiquing hedge funds non but for providing far less alpha inwards to a greater extent than recent times, but, partially in addition to provisionally, explaining why. It’s non exactly their returns that bring gotten to a greater extent than pedestrian, but the actual strategies they use bring equally well. This is dissimilar from, in addition to to a greater extent than concerning than, say, withal relatively unique strategies exactly having a misfortunate menstruum (which, of course, tin happen).

The Wrong in addition to Right Way
Legions of journalists, pundits, bloggers, FinTwits, famous investors, in addition to other fiscal glitterati, bring made really critical comments nearly hedge fund surgical operation — most, if non all, is based on wrong analysis.

I bring tilted at the windmill of this silliness before (two examples are here in addition to here). 2 But, apparently, shockingly, I bring non had groovy influence on the dialogue equally the bad comparisons in addition to histrionic statements that follow them withal dominate the discourse. So, in i lawsuit to a greater extent than I heighten my lance, spur on my faithful destrier, in addition to charge, dreaming the impossible dream that this fourth dimension I’ll last to a greater extent than convincing. If a moving painting helps, essay this i (I’m the squinting dude):...MUCH MORE

Previously from Cliff's Perspective:
Clifff Asness, AQR—"Risk Parity Derangement Syndrome"
A Mini-Mea Culpa: Cliff Asness in addition to Risk Parity
AQR Capital's Cliff Asness on Environmental/Social/Governance (ESG) Investing
The footnotes are pretty interesting in addition to a possible threat to Matt Levine's hitherto unchallenged fn dominance...
AQR's Cliff Asness on CalPERS Hedge Fund Decision