Saga of Financial Markets


Last updateSat, 29 Jul 2017 12am

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End of Alpha?

Alpha is a risk-adjusted measure of the so-called active return on an investment.  With the fundamental change to the availability of information and in the capital to act on it could simply earmark the end of ‘alpha’, beating the market consistently through active management.

Today, anyone with the money to pay for the data feed and willing to sit in front of a Bloomberg terminal and, with a few keystrokes, bring up years of financial statements for businesses across the globe. Tap again and an investor can ponder charts showing the predictions of professional analysts, details of the company’s debt, as well as the identities of shareholders, competitors and peers.

The service, and others like it that sit user friendly screens atop vast databases of information, have made it far easier to analyse asset prices, but harder to gain an edge over peers by acting faster, or more smartly.

English: The value of $1000 invested in the he...

English: The value of $1000 invested in the hedge fund Long-Term Capital Management, of $1,000 invested in the Dow Jones Industrial Average, and of $1,000 invested monthly in U.S. Treasuries at constant maturity. (Photo credit: Wikipedia)

John Longhurst, head of emerging market equity research for Pimco, says that when he became a stock analyst in the mid-1980s, “information advantage covering continental European companies was often little more than being able to get an annual report in English” and  “10 to 15 years ago I could sit with clients and talk about how being globally connected through multiple offices and working in a well-resourced entity were competitive advantages. No more.”

As a matter of fact, since the start of 2010, majority of hedge funds, have trailed both global stocks and bonds, meaning that they have not added value to the simplest of portfolios.

“When hedge funds were at $200bn, there were probably a lot of inefficiencies in the markets that the smart guys could identify,” says Denis Bastin, a consultant to asset managers. Now that the industry is more than 10 times that size, however, before using leverage, the market inefficiencies must be far larger for it to generate alpha, even as the number of smart investors hunting them has mushroomed.

mx32809The effect can be seen in the narrowing dispersion of hedge fund returns – the difference between the best and worst performers. In 2011, while the average hedge fund lost money, according to HFR, a data provider, the top 10 per cent of funds made a respectable 19.5 per cent on average.

Yet that respectable return was the worst performance by the hedge fund elite since 2000. The top 10th of the industry had made at least twice as much in each year of the previous decade. These relatively muted returns continued into 2012.

Could we still deliver alpha?  Mr Bastin probably said it right “Yes, we have a lot of information that is readily available, but you still have to interpret it. What really counts is the skill set and the ability to interpret those numbers.” Such skills, though, are held by perhaps 5 to 10 per cent of the current investor universe. “Most of the others have no business being in the space.”

Reference:  Financial Times, Dan McCrum, 2012-09-10, “End to ‘alpha’ spells trouble for fund managers”