Alternative Assets: Are They Still Worth It?

Abstract

Though the authors strongly believe that so-called “hedge funds” are not an asset class but a fee structure, they observe that investors tend to look at them generically. Their performance in the past few years has raised a number of questions. Performance in 2008 and subsequent years, for instance, has suggested that downside protection may be less than expected; that liquidity may be less than anticipated; or that absolute returns may in fact be negative! The authors compare the returns of three generic strategy groups to traditional asset benchmarks and initially find that alpha, defined as a non-beta-adjusted excess return vis-à-vis that benchmark, has really not been positive over the last several quarters. They then define a segment of the broad universe in each of the three strategy groups using objective criteria—minimum size and length of reported track record—and re-do the foregoing analysis. They find that, though the screening process eliminates as many as 95% of all managers, it still contains between 50% and 70% of the assets managed in these strategies. They also find that the rolling alpha generated by the selected group of managers is actually considerably higher than for the universe as a whole. They conclude that the industry has matured, and that, with maturation, comes some alpha dilution; yet, though the industry as a whole may no longer benefit from the tail winds it enjoyed for a long time, there remain a number of strategies and managers where material value added is available. This will place an increased premium on manager selection.