LETTER TO THE EDITOR: IBBOTSON IS WRONG

Regarding your recent article by Roger Ibbotson on hedge funds, I felt compelled to respond to his comments. Hedge funds began as a means to minimize the month-to-month volatility that mutual funds displayed. Since I have not completed an exhaustive search on when, by whom and why the term “hedge fund” was first used, misnomer or not, hedge fund is the rubric under which a growing number of private limited investment partnerships fall.

Who cares what these vehicles are called? This is not the point.

Generally, hedge funds seek to produce “absolute returns,” not the “superior performance” Mr. Ibbotson notes. This absolute return orientation is in keeping with the original intent of hedge funds.

Is there “no clear relationship between fund size and future returns”? A study done by Mihir Meswami of Tremont Advisers on 200 funds over a three-year time-frame indicates that such a relationship does exist — the bigger the fund, the better the returns. As all circumspect investment professionals state, “Past performance is no guarantee of future success,” but the prospective investor has to use something to assist in the selection process.

As to the data used by Mr. Ibbotson, Mr. Brown and Mr. Goetzmann, why did they not collect data themselves and why did they use such a small universe when it is well known within the hedge fund world that there are significantly more funds than the 108 used?

If one is going to do a scholarly analysis of an investment topic, wouldn’t the norm be to identify the largest universe possible and to collect data directly from those responsible for creating those data? Doesn’t scholarship demand more and higher levels of research than most of us have time to complete?

And, what is this “algorithm to group managers … according to how they performed, rather than what they claimed to perform.” So what? Anyone with the time and the data could have done likewise — sans algorithm. Do all investors invest merely o
n performance? Are there other criteria for selecting in what to invest?

Given the huge amounts of pension fund money around the world invested in fixed-income products, there appears to be a proclivity away from performance and towards consistency, lower volatility and lower risk (the very objectives “traditional” hedge funds seek to achieve).

Mr. Ibbotson and his co-authors “know better” than to say that the market sector determined the return, not the manager. Don’t “generally favorable” Sharpe ratios indicate that the managers do matter (as do size, number of years in operation and style)?

Isn’t Mr. Ibbotson forgetting that managers have very specific expertise, and that if they are to be compared, then they must be compared according to style, size and “age”? Many managers, especially in the hedge fund world, are as concerned about volatility, risk, consistency of return and correlation as they are about pure performance. Otherwise, why be concerned with hedge funds, mutual funds, separate accounts, etc.? Just throw them all together because all that is important is performance.

In the end, contrary to Mr. Ibbotson, Mr. Brown and Mr. Goetzmann, managers do matter; so, too, does size, as do style, age and objectives.

It seems strange to be challenging someone like Roger Ibbotson, but when someone is wrong, they are wrong, regardless of who they are. I hope this will encourage Mr. Ibbotson and his co-authors to go back and do it right the next time.

Daniel Zibman

Director, offshore investments

Tremont Advisers Inc.

Rye, N.Y.

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