Forget Peer Groups And Indexes; Hypothesis Testing Will Revolutionize Due Diligence For Hedge Funds

 

Peer into the Future of Hedge Fund Evaluation: Send in the Clones from Ron Surz on Vimeo.

United States equities have reached new highs, skyrocketing more than 100% since May 2009, as bond yields remain near historic lows. Stir in the federal government’s humongous budget deficit and the imminent tapering of the Federal Reserve’s quantitative easing program and we’re looking at one rocky future. No wonder it’s a bull market for investment alternatives, especially hedge funds.
 
The demand for these products is sure to increase substantially in the years ahead as the crowd grapples with the harsh reality of the future. But separating the alpha wheat from beta’s chaff is crucial in the business of intelligently selecting hedge funds.
 
In the future, we won’t pay much for exotic hedge fund betas (risk profiles), but the market will continue to put a premium on superior human intellect. We’ll know the difference because we’ll abandon simple-minded performance benchmarks like peer groups and indexes, and replace them with smart science.
 
Prudently choosing hedge funds demands a higher standard than the traditional methods. Hedge funds, after all, are unique. Products in the same strategy are usually galaxies apart when it comes to management details.
 
That unique quality is also the primary reason why a robust due diligence process is essential. The definition of unique is “without peers,” which means that a distinctive hedge fund can’t be squeezed into an artificially defined group. “Unique” and “peer” simply do not play well together. Hedge fund managers win or lose against peer groups because they are different, not because their strategies are better or worse than quasi-comparable strategies.
 
No one wants or needs to pay for exotic betas that can be reverse-engineered (replicated). In sharp contrast, everyone is willing to pay for that critical factor that can’t be synthesized: superior human intelligence and wisdom that engender profitable decisions by way of savvy investment choices.
 
Yes, we should be prepared to pay a fair price for brainwork, commensurate with the level of brainwork rather than the typical “2 and 20” fee. But first we’ll need a robust model for deciding who is truly delivering performance in the hedge fund universe.
 
There is an alternative to peer groups that is totally unbiased so you and your clients make better decisions, and it’s far less expensive than the universes you’re currently paying for. Performance evaluation is a hypothesis test, and hypotheses are tested by comparing the actual outcome to all of the possible outcomes. That’s exactly what we’ve done to replace peer groups. Portfolio Opportunity Distributions (PODs) create all of the portfolios the manager could have held, selecting stocks at random from the manager’s benchmark. You then compare what actually happened to all of the returns that could have happened, and you can be confident that your inferences are not contaminated by the host of biases in traditional peer groups.
 
Check out our Oscar-worthy hedge fund movie for a brief, fun and enlightening look at why hypothesis testing and cyberclones will revolutionize due diligence.
 

This Website Is For Financial Professionals Only


A Strategically Focused CE Curriculum

With classes approved for over a decade by the CFP Board, IWI, and NASBA, Advisors4Advisors CE classes are an optimal knowledge stream for CFP®, CIMA®, CPA, CPA/PFS®, CFA®, and other practitioners. It's not a grab bag of speakers willing to sponsor CE content. Nor is it a one-man CE course. It's a group of subject matter experts with amazing communication skills and a history of thought leadership that, together, give advisors a well-rounded knowledge system for running a professional practice ethically and intelligently.

CE Since October 2008

A4A CE classes for financial professionals began in October 2008, the week Lehman Bros. collapsed. Initially billed as “The Financial Crisis Webinar Series,” A4A connects advisors with authoritative sources on investing, tax, and financial planning, chosen by A4A Editor Andrew Gluck, a veteran financial reporter. A4A members get a stream of CE classes for an advisor who: 

  • holds a CFP®, CIMA®, CPA, CPA/PFS, CFA or other designation requiring CE annually 
  • values monthly CE classes by Fritz Meyer, Craig Israelsen, Bob Keebler, Frank Murtha, or Andrew Gluck
  • diversifies a core of client portfolios in low-expense funds
  • invests based on MPT and economic fundamentals
  • advises on tax and financial planning as well as investing
  • needs financial counseling skills
  • wants the Certified Financial Counselor™ designation 
  • is building a brand as a thought leader locally or in a niche
  • wants the facts when bad news breaks
  • wants CE aligned with a content marketing system
  • wants 24/7 access to CE on-demand
  • insists on objective evidenced-based tax and investment planning analysis
MEMBER REVIEWS 
William Desormeau, Jr.  
It is not possible for me to overstate the cumulative value that Craig, Bob and Fritz have added for over 10 years to my investment advisory practice, as well as for personal and family financial planning. A4A gets my highest recommendation
Lynn Najman, CFP®
I’ve subscribed to A4A since its inception, and always find it intellectually stimulating and on point. It’s one of the few CE solutions out there that doesn’t waste my time by pushing product or talking down to me.

PeteDeacon-CPA-CFP

Pete Deacon, CPA, CFP®
A4A has had a profound effect on my business. Since 2009, I’ve relied on the consistent messaging and updates to run my business successfully. Being able to present the information from Bob, Fritz, and Craig's ongoing CE webinars has been a significant benefit.

fredericMayersen-phd-cfp

Fredric Mayerson, MBA, PhD, CFP®
I've been a financial professional and professor of finance for 35 years and find Fritz Meyer and Robert Keebler to be among the most engaging, incredibly knowledgeable, and experienced presenters I’ve encountered. They deliver an extraordinary amount of information in an extremely interesting way — sequentially and developmentally, utilizing pedagogical tools and techniques that few possess.  A4A to is the most consistently excellent CE program available.  
Ron Roge, MS, CFP®
I’ve been attending A4A many years because the CE classes are outstanding, and my time is valuable. Though I have over 35 years of experience, I’m always learning something new on A4A. I attend fewer conferences now because the CE is generally not advanced. If you want to learn from the best, in a faster, easier, and less expensive way, I highly recommend A4A.

John R. Day, CPA/PFS®

I’ve been a member since 2011 and never miss the monthly webinars with Fritz Meyer. I appreciate Fritz’s independent views on the economy and markets and Bob Keebler keeps me updated on excellent tax planning ideas. A4A is a great value!

NormanPolitzinerCFP

Norman Politziner, CFP

I wouldn't miss a Fritz Meyer webinar unless my pants were on fire. I've relied on Andrew Gluck's knowledge systems --client communications and CE -- for two decades. It's simply the best solution for tax, financial, investment, and risk-management professionals.®   

Dan Hawley, CFP® 

A4A, for over a decade, has been a great resource for useful and accurate information and CE. A4A and Advisor Products are bargains for an advisory practice. 

KevinBrosious-CFP-CPA-PFS

Kevin Brosious, MBA, CFP®, CPA/PFS®

I get CPA CE credit and CFP credit for the webinars.  But not only that, the A4A content is terrific