Intriguing piece since it is based upon the assumption that hedge funds actually generate alpha. An assumption that seems a little tenuous given the chronic underperformance of hedge funds.
The genesis of this myth comes from the insider trading scandals of the 1980’s, leading to one of the most famous movies about financial markets of all time, Wall Street. Even a recent college graduate from Columbia School of Journalism could comprehend the advantage taken by a small number of funds by obtaining non-public information, ahead of everyone else, and moving quickly to capitalize on it, or manipulating the market with it. Wave after wave of similar high profile scams have hit market over the following two and a half decades dealing with everything from earnings info being passed to traders, to order flow manipulation, principal research violations, on and on and on.
All of these violations have one central theme, if you have information that no one else has, you can make a lot of money. And herein lies the genesis of the myth that most if not all alpha created on the buy side comes from an informational advantage, and because of that, communication between and sharing of information amongst the buy doesn’t take place.
This myth has been perpetuated by the press for largely sensationalistic purposes (read pageviews). Yes, there have always been bad actors who have created alpha in this manner, and no matter how hard regulators work (not very hard), there will always be a few of them one step ahead.
More here – INTEGRITY Research Associates
