Aggregate Alpha in the Hedge Fund Industry: A Further Look at Best Ideas

28 Pages Posted: 26 May 2020 Last revised: 10 Dec 2020

See all articles by Faryan Amir-Ghassemi

Faryan Amir-Ghassemi

Epsilon Asset Management

Andrew Papanicolaou

North Carolina State University - Department of Mathematics

Michael Perlow

Epsilon Asset Management

Date Written: April 26, 2020

Abstract

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

Amir-Ghassemi, Faryan and Papanicolaou, Andrew and Perlow, Michael, Aggregate Alpha in the Hedge Fund Industry: A Further Look at Best Ideas (April 26, 2020). Available at SSRN: https://ssrn.com/abstract=3586138 or http://dx.doi.org/10.2139/ssrn.3586138

Faryan Amir-Ghassemi (Contact Author)

Epsilon Asset Management ( email )

110 e 25th Street
New York, NY 10010
6468090789 (Phone)

HOME PAGE: http://www.epsilonmgmt.com

Andrew Papanicolaou

North Carolina State University - Department of Mathematics ( email )

Campus Box 8205
NC State University
Raleigh, NC 27695-8205
United States

Michael Perlow

Epsilon Asset Management ( email )

110 e 25th Street
New York, NY 10010

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