FEBRUARY 28, 2016
The performance of hedge funds is one of the most written about topic in the financial media. Headlines herald each week's performance -- i.e.; Hedge Funds beat Stocks last week -- as if the information is actually useful for investors or conveys any truths about hedge fund performance. The topic of hedge fund performance is dominated by hedge funds themselves, their industry groups, and the "service providers" who depend on hedge funds for access and information. It is therefore no wonder that it is heavily skewed towards showing hedge fund performance in a positive light. A typical study or "white paper" takes a snapshot of hedge fund performance and either state or implies that the performance in that time period is indicative of hedge fund performance in general. At the same time as the industry piles on analyses, academics have been studying the issue with more rigor and over a longer time frame. However, academics don't have the stage or the resources to counter the industry's voice. It is therefore a hugh service to investors to have
the academic research of the past two decades synthesized in a recent paper by two recent papers: Vikas Agarwal, Kevin A. Mullally and Narayan Y. Naik in an August 2015 paper, Hedge Funds: A Survey of Academic Literature,” and Hedge Funds: A Dynamic Industry in Transition,” by Mila Getmansky, Peter Lee and Andrew Lo. The summaries cover the research of over 200 academic articles spanning "hedge fund era" of 1990 until today. The findings are highly critical of the claims made by hedge funds for their own performance. Below are representative findings of these research summaries:
Hedge fund return-generating processes
Manager skill in hedge funds
Relation between investor flows and fund performance
The findings are starkly at odds with the viewpoint presented by the industry. What comes across is widespread disagreement about methodology and findings; negative or ambiguous results; a paucity of studies and data; and little effort to implement any of the research in a market or trading setting.