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By Tyler Durden

Morgan Stanley’s chief US equity strategist, Adam Parker, has not had a good year so far and as we reported last week has one big fear: being “the counter-indicating idiot.”

Today, we give Parker credit for tackling head on the very sensitive issue of persistent asset management underperformance, and unlike his hedge fund peers who ascribe just an 8% causality to “stock selection” as the driver behind poor returns (with more than a majority blaming their peers or “crowding”) Parker is at least honest: “the truth is that 100%, at some level, should have said “poor stock selection”, and what these data reveal is that 92% of respondents are blaming something other than their stock selection methodology for the current underperformance. Our portfolio has outperformed for five straight years, and is lagging this year. It is 100% stock selection.“

With that out of the way, Parker then proceeds to list the 10 specific excuses given by hedge funds to justify their poor performance for the 7th year in a row.

* * *

From Morgan Stanley’s Sunday Start, by Adam Parker:

The Ten Excuses for Bad Performance

At two recent Morgan Stanley investor conferences, the question of poor hedge fund performance surfaced repeatedly. We surveyed a group of long/short fundamental equity hedge fund managers at one of the conferences, asking them for the primary reason for poor performance of their industry.

The answers were: 54% said “crowding”, 23% said “factor exposures”, 8% blamed “macro headwinds” and 8% said “poor liquidity”. The remaining group (also 8%) said “poor stock selection”.

In other words, when performance is bad, it is beta, when performance is good, it is alpha. The truth is that 100%, at some level, should have said “poor stock selection”, and what these data reveal is that 92% of respondents are blaming something other than their stock selection methodology for the current underperformance. Our portfolio has outperformed for five straight years, and is lagging this year. It is 100% stock selection.

The alpha from the HFRI long-short index was close to 14% per annum in the early 1990s, and has been slightly below zero for the past few years.

Why is this? We don’t claim to have some systematic rank ordering of reasons for the decay in performance, but here are ten thoughts.

1. First, there has been massive growth in the total number of hedge funds, with HFR estimating that there are 3,400 equity-focused hedge funds today (about as many as stocks under global coverage by the Morgan Stanley research department).
2. Second, low interest rates have removed the rebate that hedge funds received, a non-trivial driver of historical returns when rates were materially higher.
3. Third, hedge fund CIOs are increasingly cautious. Since 2003, FAS123R has made it illegal for hedge funds (and everyone) to know anything material and non-public in the US, at least, and the high-profile and frequent investigations of hedge funds have curtailed information-seeking at some level.
4. Fourth, the more rapid availability of information has materially shortened the time arbitrage that existed …read more

   Source: Morgan Stanley Lists The Ten Excuses Hedge Funds Give For Bad Performance

       

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   Posted July 10th, 2016 in Uncategorized.