Over the past several years we have repeatedly stated that despite protests to the contrary, the single biggest factor explaining the underperformance of the active community in general, and hedge funds in particular, has been the ubiquitous influence of the Fed and other central banks over the capital markets.
Specifically, back in October 2015, we wrote that “as central planning has dominated every piece of fundamental news, and as capital flows trump actual underlying data (usually in an inverse way, with negative economic news leading to surging markets), the conventional asset management game has been turned on its head. We have said this every single year for the past 7, and we are confident that as long as the Fed and central banks double as Chief Risk Officers for the market, “hedge” funds will be on an accelerated path to extinction, quite simply because in a world where a central banker’s money printer is the best and only “hedge” (for now), there is no reason to fear capital loss – after all the bigger the drop, the greater the expected central bank response according to classical Pavlovian conditioning.”
Several years later, Goldman Sachs confirms that we were correct.
In a note released overnight by Goldman’s Robert Boroujerdi titled “An Rx for Active Management” and which seeks to explain the now chronic underperformance of the “smart money”, the Goldman analyst says he has identified two key considerations impacting the performance of actively managed equity funds including 1) the nature of market regimes and 2) behavioral tendencies of portfolio managers.
Among the various considerations described by Goldman, both market and behavioral, chief among which the observation that alpha is cyclical and that “there have been 4 distinct alpha cycles since 1990, with prior periods of persistent alpha (1990-94; 2000-09) each followed by a respective period of underperformance (1995-99; 2010-2016)”…
