Science fiction author William Gibson once observed that “The future is already here, it’s just not evenly distributed.”
The same can said for alpha, or the ability of money managers to deliver market-beating returns.
Reports of high fees and underperformance have long dogged the alternative investment world, mainly private-equity, venture-capital and especially hedge funds. Last year, returns were negative versus slight gains in total returns for most benchmarks. This year, theHedge Fund Research Index has gained half as much as the Standard & Poor’s 500 Index. (Whether the S&P 500 is the appropriate benchmark is a reasonable question, but it’s a debate for a different column.)
Often overlooked within the industry, however, is the small subset of managers who consistently seem to outperform their peers. Their funds attract more assets and have better relative performance to benchmarks. They might even justify the lofty fees they charge, famously 2 percent of assets under management and 20 percent of any investment gains.
One of the difficulties in assessing this investment universe, unfortunately, is that much of it is based on anecdote rather than data. The problem is the lack of mandatory standards for disclosure. Private funds with limited partners — mainly high net worth accredited investors and institutions — have no legal obligation to publicly disclose their performance. Unlike mutual funds, alternative investments are free to stay mum about their track records.1
There also is an inherent survivorship bias in the results that we do have. If a fund is underperforming, it can simply skip reporting that quarter or year. That means the funds that are doing badly are missing from the aggregate results. Although limited partners in funds might insist on receiving audited returns, third parties that gather quarterly and annual numbers for comparisons are left to wheedling, cajoling, begging and pleading for voluntary data disclosure.
Even when performance is disclosed, it is self-reported, using an array of different accounting standards.