Chasing Winners: The Appeal and the Risk (Commonfund)

August 2014

KEYWORDS: Hedge Fund Performance, alpha, beta, asset allocation

Authors:

Commonfund Hedge Fund Strategies Group

Organizations:
  • Commonfund

Summary:

Within the universe of several-thousand active hedge funds, many managers have received outsized benefits from the extended broad market updraft, and for an allocator selecting managers to hire – and perhaps selecting among others to fire – the draw of managers that have produced outsized recent winners can be powerful.  Yet, such a strategy can work against investors in the long run.  This is at least partly because this strategy is implicitly based on the manager’s ability to continue to track market movements across investment environments, even though evidence for this ability within the manager universe is not robust.  Such a strategy also implicitly discounts alpha, which experimental evidence suggests also detracts from best long-run results.

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