From ‘Alpha’ to ‘Smart Beta’
The Economist last month had a great article entitled “From alpha to smart beta” (click here to read the artice). With their tongue firmly pressed against their cheek, the Economist highlights a concern of every investor; what was my performance and subsequently how much am I paying for it. The fact of the matter is markets are a zero sum game. That is, for every person that makes a profit, there is another person with an equal and opposite loss. Hedge funds, the high priests of market inefficiency, charge high (typically 2% asset management and 20% performance fees) in order to produce returns above their benchmark aka to find Alpha. Because not everyone can create alpha, it is very hard to produce consistently. So hard in fact many hedge funds have failed to deliver on their promises, producing very underwhelming returns with very hefty fees attached. While there are certainly a number of hedge funds that produce alpha, in aggregate they have not been able to do so.
We would like to bring your attention to the industry’s dirty little secret: a 60/40 stock/bond portfolio produces nearly the same returns as the HFRI Index (even when shown Gross of Fees), but without the fees associated. We believe, as I’m sure you would agree, it’s better to have that money re-invested in your portfolio than overpaying for performance.