Cliff Asness, the renowned founder of AQR Capital, has published a new white paper critiquing common ways used to compare the overall performance of hedge funds and suggesting better comparisons for investors to make. But he has a sting in the tail for some hedge fund managers.
The paper, ‘The Hedgie in Winter’, says that hedge fund returns are often compared with traditional 100 per cent long-only equities portfolios and, more recently, the comparison period has tended to be the nine years since the global financial crisis. Both are wrong, Asness says. He is “harshly critical” of such comparisons but says he does not “rescue” hedge fund performance since the GFC.
“Actually, I show that doing the comparison correctly, hedge funds have petered out in the last third to half of my sample adding little to no value. “Petering out” means not adding or subtracting much value. This is far less extreme than the commonly reported epic disaster of hedge funds destroying many billions of dollars of their clients’ money, which follows from the aforementioned fallacious comparison. But, it’s still not very good…
“I argue that much of the ‘petering out’ of hedge funds in the last third of our sample is likely due to hedge funds transforming from something mostly different from traditional stock picking (from, say, the early 1990s to the early 2000s – and likely even more true further back in time – but unfortunately we don’t have reliable data much earlier) to something far closer to traditional active mutual funds (early 2000s to now) … but with higher fees.”
Asness suggests that the manner of change that many hedge funds have undergone may well signal their “winter”, because their correlations are too close to those of traditional active stock pickers and that hedge funds “are no longer what they once were”.
“There are no proofs above, just stories and supportive data. But I find the story that hedge funds as a whole are now much closer to regular old traditional active stock picking, and thus less special than before, quite plausible. Given traditional active stock picking is such a consistent long-term disappointment, this ain’t good.”