- The Hedge Fund industry has been communicating to their clients that the current environment is characterized by especially low volatility and especially low price dispersion. They have further claimed that this has made it particularly difficult for Hedge Funds to generate alpha. However, if we examine volatility levels over the past 10 years it is clear that while current volatility is below average it is not at unheard of levels. In similar historical environments we have seen Hedge Funds perform relatively well.
- It seems more likely that the cause can be found in the increasing allocations to Hedge Funds from institutional investors. Hedge Fund assets under management have nearly tripled over the past 10 years, and Hedge Fund performance has dropped over that time frame. We believe these inflows have been diluting alpha opportunities, which limits the ability of Hedge Funds to create value.
- Until monetary policy and interest rates recover to more normal levels, which may allow asset values to more reflect fundamentals, Hedge Fund strategies may be able to capture value by focusing on idiosyncratic opportunities, and opportunities provided by diverging growth and interest rate cycles across markets.
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