The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own.
Friday, July 19, 2013
Hedge Fund Alpha is Negative; Down Around 1700 BPs in 11 Years
Adam Parker of Morgan Stanley is out with a new report on the S&P 500. He notes that hedge fund alpha has tanked since early 200s and today is still negative, with a drop of about 1700 basis points. At the same time correlation is up making many hedge funds appear to be nothing more than closet index funds.
Adam S. Parker, Ph.D., Chief US Equity Strategist, Morgan Stanley, is out with a great new report titled ‘US Equity Strategy’. In the 99 page report Parker has nearly a hundred interesting charts. Morgan Stanley sees the S&P 500 (.INX) in 2014 at 1600 in the base case scenario . However, the most interesting data is on hedge fund alpha and hedge fund correlation with the S&P 500 (.INX).
HFRI and S&P 500 Correlation
In terms of correlation, the S&P 500 correlation with the HFRI Equity Hedge Index is moving up. Basically, investors are paying 2/20 to buy a closet index fund. As Parker puts it (in a much more eloquent fashion) ‘Hedge Funds in Aggregate Are Essentially Long the S&P 500′. See the chart below.
The other piece of data has to do with hedge fund alpha. The chart below speaks for itself and is another sad tale. Hedge fund alpha is now negative, meaning (for the large percentage who find alpha to be a useful metric) that hedge funds are underperforming.
When you put the two facts together you see how truly sad the situation is. Not only are many hedge funds just closet index funds with enormous fees, but investors are paying for both the underperformance (and risk adjusted underperformance).
I would guess that alpha has fallen 1. Because there are so many more hedge funds with guys living in their parents basements charging 2/20 who might not be great money managers 2. Increasing correlation due to the large role central banks are playing in today’s market. Whatever the reason, it is hard to argue that investors would have been far better off putting their money in a hedge fund the past few years, as opposed to an S&P 500 index.