When two universes collide – the “Active Versus Passive” debate

Allocating to hedge funds for the ordinary individual and for most financial advisers/advisors is as easy as passing through the eye of the needle

In the passive active debate there is a duality, two universes living side by side.  And by this I mean we have those who say that active management is a zero sum game and worse when fees and transaction costs are taken into consideration.  On the other hand we have those who say that active management is not a zero sum game and that value can be added even after fees and transaction costs are taken into account.   Interestingly academics have taken both sides of the debate.

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Hedge funds–where has the Alpha gone…?

Hedge Funds Kiss Their Alpha Goodbye: what a surprise!  I have never been enamoured of hedge funds as a separate asset class per se or the arguments used by many to justify their blanket inclusion in portfolios.  I have always felt that many of the above average type hedge fund returns could be accessed by deep contrarian plays which most investors are unlikely to be able to stomach, but also that many of the hedge fund plays themselves, once you accounted for the management costs and the leverage, were hardly superior to straightforward investing.    Many of the returns available during the 1990s and the first two years of the noughties, were there by virtue of market itself: note the value plays of the late 1990s and early 2000s which set up many hedge funds for above average returns.  Since then, the return differentials have declined.  And note, the chart in the linked article provides a rolling 60 month period, meaning that the slow and steady decline shown exists only by virtue of trailing returns.    Hedge funds and niche valuation plays should only be used by those with the valuation models and resources needed to assess the opportunities and risks, but lack the manpower and resources to actually manage.   Please note my 2006 report on Hedge Funds within Private Client Portfolios and under noted excerpt from the report.

July 2006 – Hedge Funds & Their Place in the Private Client Portfolio

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