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

33 Pages Posted: 26 May 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

Our paper addresses the portfolio selection of hedge fund firms as a measure of abnormal skill. It further decomposes this skill through the lens of canonical `Best Ideas'. Both are achieved through the application of regulatory mandated position-level data from the SEC, colloquially known as 13F data. The approach aims to reduce common biases associated with traditional return database analysis while unlocking position-level portfolio analysis. Across a composite of hedge fund managers and twenty years of analysis, we find historically abnormal excess return associated with their security selection. However, there has been a significant decline in this abnormal return after the 2008 financial crisis. We examine this out-performance through portions of each manager’s portfolio, using ex ante methodologies to elicit Best Ideas. We find no significant difference in return characteristics between these Best Ideas relative to the aggregate portfolio positions of these hedge fund managers. These findings are broadly in contrast to similar studies conducted on mutual funds, demonstrating differences in portfolio behavior across the two classes of fund managers.

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 )

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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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