How do hedge funds generate alpha?

Legacy_user

How do hedge/topiary funds do better than other active management and the index?

Is it that with high fees they can afford more research?

Is it that secrecy allows them to make insane risks/allocations that retail investors wouldn't tolerate?

Or is it just leverage making it look like they're better stockpickers when really they don't really know what they're doing?

If there is some sort of fund that let's you access hedge funds, are they worth it? Or can we replicate/ learn from their behaviour?

EdGasket

Many hedgies have gone bust. They tend to use derivatives and high gearing. Like everyone else, some win some lose except they do it on a more dramatic scale. There are ETFs specifically designed to replicate hedge funds if you are desperate; see:

http://www.etf.com/etf-education-center/21043-article-46-alternatives-etfs-can-an-etf-replicate-a-hedge-fund.html

System

So its gambling with survivorship bias...

Wouldn't mind gearing an index fund but wouldn't time the meerkat

kidmugsy

MatthewAinsworth wrote: »

How do hedge/topiary funds do better than other active management and the index?

I imagine that gearing is much of it. Some may have engaged in insider dealing too. And probably in the early days they may have been prepared to invest in exotic and illiquid things that turned out well. Once there are lots of hedge funds competing for those exotics the advantages are likely to dwindle away. Then you're just investing (in a very expensive way) in someone else gambling on his hunches.

But that's just conjecture.

BananaRepublic

I am sure the results of hedge funds are out there somewhere, maybe you need to pay for the information. Also look up Long Trerm Capital Management for a well known 'success' story. They used the Black-Scholes equation to model the market.

AnotherJoe

MatthewAinsworth wrote: »

How do hedge/topiary funds do better than other active management and the index?

What makes you think they do?

Eric_the_half_a_bee

MatthewAinsworth wrote: »

How do hedge/topiary funds do better than other active management and the index?

They don't. Their performance over the last 5 years has been horrendous.

BananaRepublic

Eric_the_half_a_bee wrote: »

They don't. Their performance over the last 5 years has been horrendous.

Do you have a link to the statistics/data?

Eric_the_half_a_bee

BananaRepublic wrote: »

Do you have a link to the statistics/data?

For example

Since the start of 2005 (10+ years), the HFRX Global Hedge Fund Index and HFRX Equity Hedge Index (two investable indices widely used as benchmarks in the industry) have posted negative returns (-1% and -6.4% respectively). Over that same time period, the Barclays Aggregate Bond Index was up 62.1% and the S&P 500 up 97.6%.

https://pensionpartners.com/the-hedge-fund-myth/

Pincher

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BananaRepublic

I interact with the spirit world on Saturday evening. It doesn't help me pick stocks, in fact walking can become challenging ...