Are hedge funds too conservative and risk shy?
A recent white paper I read from Willis Towers Watson (Willis) suggests that the level of alpha and the volatility of alpha are at their lowest levels. The paper – Hedge Funds: A New Way – ultimately goes on to make a positive case for why hedge funds remain integral to investors’ portfolios but it is interesting to think, for a moment, as to why alpha levels are so low.
The data set used by Willis Towers Watson covered a period from 1993 to 2018. It found that the highest levels of rolling monthly alpha occurred between 1993 and 1998, while the lowest occurred from 2012 to 2018. Is this part of a longer-term trend of subdued returns as public markets continue to shrink? Or, like all financial markets, is this a temporary cycle that hedge funds will break out of?