Where Does All The Hedge Fund Alpha Go?

Published by Bob Elliott on May 22, 2022 1:30:14 AM

The vast majority ends up in managers’ pockets. No wonder they have so many yachts.

For years investors in hedge funds have experienced a challenging combination of high fees, low returns, and high correlation to other assets in their portfolios. The cumulative effect makes hedge funds look like a bad deal.

This result is not because the alpha generated by the managers’ strategies are poorly performing. Seems the opposite is true. Excluding fees, the returns from the hedge fund industry as a whole over the last 20 years have performed as well as stocks with about 40% the risk. That’s an attractive return stream.

The problem is that the managers are taking ~70% of the alpha they generate. The chart below shows the return composition of the hedge fund industry. Half of the return comes from cash, beta, and smart beta which are all close to free for investors. Generating Alpha is what investors should be paying for since they can’t generally access it elsewhere. 

Since 2002, managers have generated ~4% alpha annually, but have taken nearly 3% in fees per year. Which leaves investors taking all the risk and seeing little benefit. At Unlimited we aim to flip this split with the products we offer to investors and with it hopefully one day we’ll be invited on one of our customers’ yachts.

For informational and educational purposes only and should not be construed as investment advice. It does not constitute an offer to sell or a solicitation of an offer to buy any security. Opinions expressed are our present opinions only. No Representation is being made that any investment will or is likely to achieve profits or losses similar to those shown herein. No investment strategy or risk management technique can guarantee return or eliminate risk in any market environment. The material is based upon information which we consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such. The historical analysis should not be construed as an indicator of the future performance of any investment vehicle that Unlimited manages.

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