Hedge Funds “Handing Alpha” to long-term investors: UBP
| Apr 23rd, 2007 | Filed under: CAPM / Alpha Theory | By: Alpha Male |
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It is generally assumed that, if all investors play by the same set of rules, markets are highly efficient and therefore alpha opportunities are scarce. But what happens when one group of investors faces artificial constraints such as liquidity requirements or cap size? These exogenous variables can pervert market processes and create (repeatable) out-performance opportunities for those players with greater flexibility. For example, some commentators have argued that the large cap bias of most pension funds creates a market inefficiency that under-prices small caps until their expected return beats large caps (or vice versa – that large caps are bid up to a point where there return drops below their “fair” price). Others have argued that the long-only constraint artificially supports stock prices by preventing the downward pressure of short-selling.
Tim Price, CIO of Global Strategies at UBP and part-time blogger makes a similar case in his commentary this month. He says that hedge funds’ obsession with short term liquidity perverts markets, creating an alpha opportunity for long term investors. Says Price:
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