Better times are ahead for hedge-fund managers as the gap
between strong and weak equities is widening this year.
Market breadth and dispersion are coming back
so hedge funds too could be coming back, said Stanley
Altshuller, chief research officer at Novus. Dispersion, or the
difference between the best and worst performing stocks, has
been steadily rising since the beginning of the year,
This is good news for hedge funds, which have been
struggling to see the high returns that earned them a
reputation as skillful stock pickers during the 2008 financial
crisis. When dispersion increases, active fund managers often
perform better, according to Altshuller.
In the equities market, dispersion in the Russell 3000 index
has risen to about 0.118 in the twelve months through May, from
0.098 in January, Novus data show. While these changes are
small in comparison to years past, Altshuller said they do
signal there is more opportunity in the market for hedge funds
to generate alpha. The measure was 0.228 at the end of 2008,
about three months after the collapse of Lehman Brothers
Rising dispersion is good for managers who have been
struggling to produce returns amid the low volatility this
year, according to Said Haidar, president and chief executive
of hedge fund firm Haidar Capital Management.
Low-cost passive index funds have been popular with
investors since the crisis as theyve outperformed many
actively managed funds that charge higher fees. Hedge funds saw
average net returns of 6.91 percent in five years through
March, while the Standard & Poors 500 index gained
10.9 percent over the same period, according to financial data
The other positive sign for hedge funds is that market
breadth or the number of equities driving positive
performance in the stock market is growing, Altshuller
Last year 84 stocks contributed to 50 percent of market
gains in the Russell 3000 index, while 32 contributed to 50
percent of the benchmarks losses, according to Novus.
That compares with 37 companies contributing to half the
indexs returns in 2015, while 68 were responsible for 50
percent of its losses.
Market breadth is the opposite of the FAANG
phenomenon, Altshuller said, referring to the S&P 500
returns that have been driven by technology companies Facebook, Amazon,
Apple, Netflix and Googles parent company, Alphabet.
Its not good for active managers, he
A broader pool of companies driving market performance means
more opportunities for hedge funds to make money on a variety
of stocks, according to Altshuller.
And while increasing market breadth and dispersion tend to
reward hedge fund managers, it punishes the passive
investors, he said. Im looking out for that
to increase further.