August 12, 2006
Hedge Funds Don’t Want Extra Returns
The fact that most hedge fund strategies are market neutral is a fact I really don’t need to reiterate. And now, clients of hedge funds have become more careful and want their hedge fund managers to ensure assured returns on their investments. So pray tell me does the alpha—the extra return that active fund managers claim to earn above the market rate – really exist?
For many trading strategies, there is a limit to the amount of money that can be moved around cheaply and briskly. While punting large amounts on the highly liquid foreign-exchange or government-bond markets is easy, betting on illiquid corporate bonds or shares is far harder. And the larger the amounts, the more expensive the bets are. For this very reason, many of the oldest and best-known hedge funds do not accept any new money. Some have even been handing capital back to investors.
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