Morgan Stanley Strategist Wonders Where The Alpha’s Gone?

Nov 21 2011 | 1:03pm ET

Morgan Stanley strategist Adam Parker says hedge funds are not producing the “alpha”—returns above and beyond what the market is generating—they promise.

Parker’s research, as reported in the Wall Street Journal, shows the correlation between hedge fund returns and the S&P 500 has risen to nearly 100% in recent years. Worse still, where there is a gap between hedge fund returns and pure market returns, it might not be in investors’ favor—the annualized excess hedge-fund return for the past five years has turned negative.

Parker says the current, highly correlated market makes it difficult to pick stocks well, which inhibits the alpha-generating abilities of many hedge funds. Moreover, some funds have produced outsized returns, the WSJ says the averages are “no doubt being dragged down by the truly horrible hedge funds out there.”


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