Peak Alpha Theory?
Oct 4th, 2006 | Filed under: CAPM / Alpha TheoryBy: Alpha Male
October’s edition of Bloomberg Markets Magazine included an article about peak oil theory that reminded me of the current debate in hedge fund circles about the modest returns of late.
Hedge fund naysayers have had a field day over the past year or two deriding hedge funds for not producing alpha (only exotic beta) or worse yet, for producing alpha that is destined to shrink and eventually disappear. Duke professor David Hsieh’s recent comments regarding the finite amount of market inefficiencies available to be exploited by hedge funds ($30b/yr. or 3% in a $1 trillion industry) have helped fuel the debate.
True or not, many commentators blame anemic hedge fund performance on the crowding of trades around the same arbitrage opportunities. While this may be true in some strategies such as merger arbitrage, the jury remains out on whether hedge funds have become victims of their own growth.
But is alpha finite like oil? And if it is, did we just live through a golden age of hedge fund alpha generation - never to be repeated? Have we passed the point of Peak Alpha?
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[…] All About Alpha looks at the important (and complicated) question of whether there is only a “finite” amount of alpha available to be exploited by investors, like hedge funds. […]
Is the world running out of oil, err I mean alpha?…
All About Alpha (via Abnormal Returns)has a post comparing the recent dearth of alpha in hedge funds to the now ubiquitous theory peak oil, asking if we have passed the peak alpha. Alpha Male points out that alpha is not…
[…] “Peak Alpha Theorists” would have us believe the world is running out of alpha. However, like oil, new market inefficiencies (i.e. alpha opportunities) will continued to be discovered as long as markets evolve. And, while alpha may look like it’s drying up sometimes, “there’s no reason to think that technology is finished this time.” […]