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)

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

The power of data

Your clients have financial news and data at their fingertips, but donít know how to interpret it. Katy Gibson of Envestnet|Yodlee and Blake Kannady of Envestnet discuss the power of leveraging aggregated data.

Recommended Video

Path to growth

Latest news & opinion

Tax reform: 7 essential strategies for financial advisers

While advisers face the difficult task of analyzing the law's impact, they will also have a significant opportunity to prove their value by implementing money-saving strategies for clients as well as their own businesses.

Tax law: Everything advisers need to know about the pass-through provision

The provision is tricky, but could provide advisers and business-owner clients with sizable tax savings.

Bill requiring fiduciary disclosure reintroduced in New Jersey

Measures would obligate financial advisers to tell clients they do not have to act in their best interests.

Merrill Lynch to let advisers text with clients

Texting has been a popular mode of communication for years, but in the past the firm's regulations have prevented advisers from using it.

Bear market for bonds has arrived, Gross says

10-year Treasury rate's move above 2.5% confirms outlook for fixed income, legendary bond manager says.

X

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.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print