Aggregate Alpha in the Hedge Fund Industry: A Further Look at Best Ideas
28 Pages Posted: 26 May 2020 Last revised: 10 Dec 2020
Date Written: April 26, 2020
This article is an examination of stock picking behavior of nearly 1,500 hedge funds using regulatory mandated position-level data from the SEC (Form 13F). Using data from June 1999 to Dec 2018, ab- normal excess alpha is found on both a gross and dollar basis. Breaking the twenty-year sample into two periods, the authors note a significant decline in gross alphas after the 2008 global financial crisis. In contrast, dollar alphas remain economically and statistically significant. This finding coincides with an increase in aggregate assets in the post-crisis period, suggesting asset growth may be impeding gross alphas. To test this thesis, the authors analyze the ’Best Ideas’ within manager portfolios. They find no significant difference between the alphas generated by managers’ Best Ideas and the rest of their portfolios, suggesting asset growth is not a significant determinant of alpha deterioration. These find- ings broadly contrast with prior studies conducted on mutual funds, suggesting differences in portfolio construction and incentive effects.
Keywords: Active Management, Hedge Funds, Stockpicking Skill, Best Ideas, 13F
JEL Classification: G0, G11, G14
Suggested Citation: Suggested Citation