Funds have been sold on the basis of manager skill, as alpha-generators. As investors come to understand alternative beta, the mystique will be stripped from hedge fund performance. Is this good or bad for the hedge fund industry?
IRC surveyed over 200 pension funds to understand their attitudes towards hedge funds. Different questions were asked, depending on whether the pension fund was currently investing (23%) or was not investing (77%) in hedge funds.
50% of pension funds currently investing in hedge funds agreed with the statement, “I believe that most hedge fund return comes from manager skill (alpha) and not from common risk factors.“ This view is at odds with academic research, yet only 30% of investors disagreed.
62% of pension funds currently investing in hedge funds expressed a desire to understand “alternative beta” factors better. Only 12% were disinterested.
68% of pension fund investors would be interested in a product which replicated hedge fund returns more cheaply, using derivatives. Only 15% disagreed.
Amongst those pension funds currently not investing in hedge funds, 50% said they would be more inclined to invest if they understood better how hedge funds generate their returns. Even amongst those funds already investing in hedge funds, 39% indicated that they would consider higher allocations if they understood better the sources of return.
