Two US academics have failed to find convincing evidence of hedge fund managers’ supposedly superior ability to manage money.
Many academics have failed to find a reason to invest in hedge funds. John Griffin, associate professor at the University of Texas at Austin, and Jin Xu, an employee of hedge fund manager Zebra Capital, are the latest to join their ranks.
They said: “An underlying assumption by many is that the best and brightest migrate to the hedge fund industry. We find some weak statistical evidence that hedge funds are better at stock picking than mutual funds, 1.32% a year, but this result is driven by technology stock holdings in 1999 and 2000. The sector timing ability and average style choices of hedge funds are no better than those of mutual funds.
“Overall, our study raises serious questions about the proficiency of hedge fund managers.”
Griffin and Xu said they had avoided the reliance on published hedge fund indices favoured by other academics, whose work has been doubted because the indices suffer from self selection and survivorship bias.
They based their work on hedge fund managers’ quarterly filings with the Securities and Exchange Commission, showing their long equity positions between 1986 and 2004.
They found the average hedge fund turns over its portfolio almost twice as often as the average mutual fund, and prefers smaller stocks with low analyst coverage, less liquidity and more volatility.