Sunday, December 28, 2008

Hedge Funds- Persistence of Returns

Burton G Malkiel and Atanu Saha published a report in 2005 looking at hedge fund returns, persistence of hedge fund returns, and variance of those returns. The work was supported by Princeton's Center for Economic Policy Studies.
The "persistence of returns" figure caught my eye. Essentially, Malkiel and Saha asked "If I am fortunate enough to invest in a hedge fund that displays better than average returns for a year, what are the odds that that same hedge fund will persist with better than average returns for the following year?"
In their 2005 report, Burton G. Malkiel and Atanu Saha claimed "We found similar results for the entire 1996-2003 period. Indeed, the probability of observing repeat winners during during the period was basically 50-50."

So there you go. Hedge funds provide low correlation, but high variance in returns and a 50/50 chance of persistently above-average returns. They have a high barrier to entry, are very illiquid, are lightly regulated, and lately seem to be a lightning rod for types like Madoff.

Saturday, December 27, 2008

Mad Mad Mad Mad World

At last count there were between 30 billion and 50 billion reasons to be upset at Bernard Madoff this month. In fact, if you count the (now excluded) potential recipients of funding from the charitable organizations he harmed, you can add thousands more to the list. In one fell swoop, Mr. Madoff harmed individuals, businesses, the arts, and sciences for decades to come and generations to follow. If you believe in the butterfly effect, his selfish actions may have wiped out whole worlds.

The need for transparency and regulation is obvious. If transparency eliminates "the edge" that exists for certain managers, so be it. If regulation becomes onerous and difficult, so be it.

The LTCMs, Madoffs, Enrons, Leesons, Amaranths, etc. have soiled the sandbox for everyone.