Hedge Funds’ Best Ideas No Better Than the Rest of Their Ideas

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(Bloomberg) -- When hedge fund stars such as Bill Ackman, Lee Ainslie or Keith Meister speak at conferences, stocks can jump or sink.

Yet managers’ highest-conviction ideas aren’t necessarily any better than the ones that support the rest of their portfolios, according to a new report that analyzed the stock-picking of almost 1,500 hedge funds over 20 years.

“The focus on hedge fund stock picks at idea conferences and events is misguided and possibly counterproductive,” said the researchers from New York University and Epsilon Asset Management. “Our analysis points to no systematic outperformance of these best ideas versus other portfolio positions held by hedge fund managers, across all size funds, and over all time periods.”

The study backs up what many industry participants have long thought: Conferences and idea dinners are often mainly an opportunity for managers to talk their book or goose returns in flagging positions. After Pershing Square’s Ackman championed his short bet against Herbalife Nutrition Ltd. at a 2013 event, some people left and went long on the stock.

The authors, Andrew Papanicolaou of NYU and Faryan Amir-Ghassemi and Michael Perlow of New York-based quant firm Epsilon, examined positions disclosed in 13F regulatory filings from 1999 to 2018. Metrics including position size relative to index weighting were used to determine which picks could be considered a firm’s best ideas. The study didn’t take into account shorts, derivatives or credit wagers, which aren’t as publicly accessible.

The trades deemed highest conviction did produce “statistically significant alpha” -- meaning they beat the broader market -- but only at roughly the same rate as the rest of the portfolios, the study found.

The report also found that alpha was “demonstrably greater” in the decade before the global financial crisis than the decade after it, and that smaller funds have generally produced more alpha than their larger competitors.

“Over time, alpha has decayed in tandem with the rise of hedge fund assets,” the researchers said.

Here are the “best ideas” stocks across hedge funds as of the end of last year, according to the report.

All hedge fundsHedge funds > $1 billion in assets
AllerganAllergan
MastercardIAC/interactivecorp
Energy TransferEnergy Transfer
IAC/interactivecorpFidelity National Information Services
Fidelity National Information ServicesNXP Semiconductors

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