Hedge Funds: "Study suggests that alpha can be measurable and is a better selection criteria than absolute returns"

From ValueWalk:

Institutional hedge fund allocators shouldn’t chase performance, as a study statistically shows that investing after high watermark performance typically underperforms the average of hedge fund performance going forward. Further, hedge fund performance evaluation windows of 3 to 5 years may not be ideal to properly evaluate beta market environment changes that impact various strategies. With the equity bull market several years old, hedge fund investors should be particularly diligent about properly identifying beta-driven returns, concludes a study on hedge fund selection.

Hedge funds: Fund manager selection based on identifying alpha

The study from Commonfund, “Chasing Winners: The Appeal And Risk,” found that fund manager selection based on identifying alpha, which it says can be identified, “consistently outperforms absolute return as a selection criterion.”  This consideration of investment manager alpha is also balanced against the caution of chasing returns.  Selecting a manager after they achieve high returns, in fact, can be a losing strategy that has been documented in more than one study.

After a prolonged bull market in equities, the study noted, there may be a natural tendency for hedge fund investors to gravitate toward managers that have captured a significant share of the market’s upside, or outperformed the market.  However, the report cautions that “since such equity upside capture is statistically a relative rarity among hedge fund strategies, such a selection criterion may lead to adverse selection.”...

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