Alpha Mail (December)

Alpha Mail - A monthly email update from AllAboutAlpha.com

Dear Alpha Mail Subscriber:

While 2008 was the best year of relative performance ever seen by the hedge fund industry (relative to the S&P for example), 2009 looks to go down as the best year relative to expectations that the industry has ever seen.

The year began with a string of obituaries for the alternative investment industry citing its worst year ever, a failure on its "promise" of absolute returns, and of course, the actions of one of its biggest (alleged) participants, Bernie Madoff.

But while hedge funds have trailed equity indices this year, hedge fund indices have now recovered most of what they gave up last year.

Assets under management, which was forecast to take up to five years to recover, are now back to 2006/2007 levels. These years are remembered as good times for the industry, not bad ones. Unless managers staffed-up like crazy in 2008, headcount overhang should not be a problem now - just as it was not a problem back in 2006/2007.

This might explain, in part, the continuing health of hedge fund compensation. According to research by Institutional Investor, it appears that working as an alternative investment manager continues to be better than a kick in the face - in most cases way better. As Reuters reported on Friday, hedge fund employees are "optimistic about 2009 pay."

Even during the near-death experience we call "2008", the fundamental drivers that fuelled the growth of alternative investments among institutional investors remained as healthy as ever (alpha/beta separation, low volatility returns, uncorrelated performance, market inefficiencies, etc.). This is evidenced by stories like this one that report how institutional investors are still "pinning their hopes" on alternative investments.

This is also evidenced by several of last month's most popular posts at AllAboutAlpha.com...

Last Month's Most Popular Posts

Hedge Funds plowing into stocks, short Recent reports and anecdotal evidence suggest hedge funds are still throwing money at stocks. The only problem is the majority of the cash is going into shorts.
Is the vaunted "illiquidity premium" partially an illusion?
An academic study finds that a hedge fund's source for pricing data can tell you a lot about its propensity to "smooth" returns.
Illegal Alpha Sure, alpha exists and can be obtained. The question, though, in the age of frauds, blowups and misnomers, is: can it be attained legally?
Why bother separating alpha and beta? Here's why. With the un-alpha-like performance of the hedge fund portion of portable alpha strategies last year, it's easy to disregard alpha/beta separation as hype. But here's a must-read paper that shows why the concept is fundamentally sound.
Equity long/short mutual funds "could easily grow twenty-fold over the next five years": Report Are "hedged mutual funds" finally ready for prime time?
In portfolio management, sometimes the sum of the parts is greater than the whole It's not that active managers are using the wrong parts, it's just that they're using the wrong numbers of them, says this must-read document.
Two amazingly simple rules for making alpha/beta allocations Leave it to the investment practitioners to come up with, well, "practical" tools...
How to succeed at long/short without really trying If watching indexes and indicators made for perfect stock-picking, wouldn't everyone do it? Another methodology on how to figure out in advance where a sector might be headed.
Gone in 45 days: Who said hedge funds were illiquid? For most businesses, completely taking down the sails and ceasing operations involves a lot more than a letter to investors and six-week's notice. Not for Galleon, apparently.
More evidence that distressed debt funds are a phoenix, not a vulture A new study suggests that distressed debt investors play a critical role in the rebirth of ailing companies.