The Strange Relationship Between Assets and Alpha: Ritholtz Chart

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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Hedge-fund assets recently eclipsed $3 trillion. One of the more popular strategies for hedge funds has been the long/short equity fund.

Charlie Bilello, director of research at Pension Partners and the source of our chart today, writes:

The main selling points and objectives for the long/short strategy are twofold: 1) to outperform the stock market over the course of a market cycle through "alpha" generation or stock picking, and 2) to preserve capital during periods of market stress.

As the chart below shows, this no longer seems to be happening.

The hedge fund industry's ability to generate alpha seems to be inversely proportional to its assets under management.

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Barry L Ritholtz at