Hedge funds' secret may lie in luck

The best hedge fund managers tend to find profits in short-term, contrarian bets

Dec 20, 2013 @ 8:20 am

The best hedge fund managers tend to find profits in short-term, contrarian bets.

That's the finding of a study published this year by Russell Jame of the University of Kentucky and set to be presented next month at the American Economic Association's annual meeting in Philadelphia.

Investigating an industry that has grown to over $2 trillion from $38 billion in 1990, Mr. Jame found the top 30% of hedge funds outperform rivals by a statistically significant 0.25% per month over the subsequent year, indicating their superior performance persists.

Star hedge funds secure profits over short periods, with more than 25% of an annual outperformance occurring within a month after a trade. The profits are also often made when managers have bet against the prevailing market view.

The winning funds are net buyers of so-called growth stocks, which are those of companies whose earnings are forecast to grow faster than the market average. They also don't trade more frequently or more profitably prior to corporate earnings' announcements, undermining any idea that insider trading explains how they make profits.

Mr. Jame's sample featured 74 hedge fund management companies managing money for 253 different clients from 1999 to 2010.

(Bloomberg News)


What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video


The #MeToo movement and the financial advice industry

Attendees at the Women to Watch luncheon commend the #MeToo movement for raising awareness about the issue of sexual harassment and bringing women together.

Latest news & opinion

Stocks plunge, advisers tell clients to hang tight

Though planners encourage calm, some are preparing investors for a correction.

Lightyear Capital's Donald Marron said to be in the hunt for Cetera Financial Group

The veteran brokerage executive, who bought Advisor Group in 2016, owned Cetera once before.

What to watch for next with the DOL fiduciary rule

Much hinges on whether the Labor Department appeals the 5th Circuit decision by April 30.

Social Security benefits losing buying power

Low inflation combined with rising Medicare costs threaten the adequacy of seniors' income.

Finra looks to streamline broker-dealer exams

CEO Robert Cook says three examination teams may be consolidated.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print