Mr. Hsieh was one of 12 provocative speakers at the CFA Institute's annual hedge fund event.
Heavy hitters from the institutional investment side of the hedge fund industry presented programs that sparked interest and questions from the audience. M. Barton Waring, managing director and head of the client advisory group at Barclays Global Investors, San Francisco, set out to prove that there is no such thing as absolute return investing. "There is a clear intent to contrast the term ‘absolute return' against the term ‘relative return,'" he said, with the understanding that traditional investment managers chafe against returns being compared to a relative benchmark while hedge fund managers are not subject to the same constraint.
Mr. Waring broke down investment returns into three components — cash, alpha and beta — and supported Mr. Hsieh's contention that alpha is a finite commodity. He reminded the audience that to gain alpha, a manager has to "take money away from people who are trying to take it away from you. … More and more people and dollars (are) pursuing (the) same opportunities." And just as no one wants to consult a below-average doctor, "there's nothing worse in the investment industry than an average active manager," he said.
Mr. Waring showed that alpha is conditional, dependent on the presence of market inefficiencies and managers having the skill to exploit them. And because alpha is conditional or relative and absolute return is dependent on alpha generation, Mr. Waring concluded "there is no such thing" as absolute return. "No wonder we couldn't get comfortable with absolute return investing!" he said.
In another session, Clifford S. Asness, managing and founding principal of AQR Capital Management LLC, Greenwich, Conn., explored the future of hedge fund investing. "Hedge funds represent the future of active management in general. In the perhaps distant future, the investing world might look like hedge funds plus index funds," he said.
Mr. Asness noted many "dark sides" of hedge funds — hedge fund betas/correlations, lags in mark-to-market valuations, hot money and survivorship bias, to name just a few — need to be exorcised before this vision becomes reality.
For example, said Mr. Asness, the industry has to adopt a "needed professionalism" to make hedge funds fit into a modern portfolio. The industry also must develop enough capacity to "make it matter."
Mr. Asness predicted that part of this impending hedge fund evolution will involve moderating return expectations; arriving at rational fees; better benchmarking; an understanding and tolerance of headline risk as inevitable but manageable; and resolution of the "transparency wars" in which third parties take over portfolio holdings reporting.