Quote:
Originally Posted by Mason Malmuth
Hi Hedgefunguy:
I was going to follow this up, but you may have just answered what I was going to ask. But reading the discussion in this thread, it appears to me that many readers are not distinguishing between hedge fund size. That is a large fund should count more than a small fund. Thus it could be possible for most funds to do poorly yet the industry as a whole be doing well. Any comments?
Best wishes,
Mason
Yes, exactly and for the same reason that if you looked at the profitability of every player who has tried to be a poker pro, it is likely negative while those pros who have been playing at the top levels for years are almost surely positive expectation.
It seems many people (including academics) have not seen this clearly.
In an effort to show that it is possible to outperform even in a highly competitive market, I have used (yet another..) the example of Billy Beane and the Oakland A's and the outperformance he has generated (a clearly winning record) with a well below average player budget. I have offered many people the bet that despite the fact that the A's are likely to still be near the bottom in salary going forward, I will bet they will have a winning record over say the next 5 year period. No one has taken me up on that bet. Revealed preference suggests, therefore, that people believe that "alpha", or outperformance, is possible in that context.
I would make a similar bet about the return per unit of risk (information ratio) **after fees** of many hedge funds, even if it the case (which I am not conceding, but might possibly be true) that the "average" hedge fund does not outperform.