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Lots Of Beta, But No Alpha Makes Jack A Dull Boy

A familiar tale, but one worth (briefly) retelling...

To be sure, it’s hard to outperform in an environment where stocks, bonds and credit all post stellar returns and capturing those returns is as simple as buying an ETF.

2019 was the year of the “everything” rally. Sure, you could have lost money, but you’d have needed to try pretty hard. Through November, some 92% of global assets had posted positive returns for the year.

The problem, for active managers anyway, is that besting benchmarks has proven to be well nigh impossible. The S&P is up 26% on the year. TLT has logged a 14% gain. AGG is up 6%, LQD 13.8% and HYG “just” 8%. Given the non-existent expense ratios those vehicles carry, you’d be forgiven for asking why anyone should bother paying an active manager. This was the best year for a simple balanced portfolio in a decade.

Given the above, it comes as no surprise that 2019 saw little in the way of alpha generation.

“Helped by a strong rally in both equities and bonds, institutional investors produced strong returns this year with returns ranging from 5% for Discretionary Macro hedge funds to 11% for Equity Long/Short hedge funds, 17% for Balanced mutual funds and Risk Parity funds, and 25% for US active Equity mutual funds”, JPMorgan’s Nikolaos Panigirtzoglou writes, in the latest edition of “Flows & Liquidity”.


He then asks the pertinent question:

How much of that strong performance reflects their natural beta to equities and bonds and how much reflects alpha?

The answer isn’t inspiring but neither is it surprising. Overall, hedge funds produced a negative alpha this year, Panigirtzoglou says.

Specifically, he notes that “relative to a bond/equity portfolio benchmark, with weights chosen to reflect the relative distance of bond and equity volatility from that of HFs over a three year rolling window, HFs underperformed by -3.3% this year”.


That’s two years in a row of “very” negative alpha, following better results in 2016 and 2017.

He goes to point out that it really hasn’t mattered what style you care to compare.

“Discretionary Macro (i.e. Macro HFs ex. CTAs) and fixed income-focused Relative Value hedge funds have produced a more negative alpha this year than equity focused Long/Short hedge funds, but all three categories produced negative alpha for two consecutive years”, JPMorgan goes on to say.

There’s really not a whole lot to add here. This is a familiar tale and one struggles to see a light at the end of the tunnel. That is, continued underperformance versus benchmarks that can be replicated for less than 20bps is a death knell for flows.

“This is especially true for Discretionary Macro HFs which on our calculations produced negative alpha since 2012 with the exception of 2016”, Panigirtzoglou rather dryly points out.

Nothing further.


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