The disappointing performance of hedge funds in recent years is a result of "too much money chasing too little alpha", argues Capital Fund Management.
Speaking to InvestorDaily, CFM partner Philippe Jordan pointed out there is a finite amount of alpha available to fund managers within global investment markets.
"Alpha by definition is an unstable and tough game to play, and you play it relative to beta," Mr Jordan said.
Australian superannuation funds should consider replacing underperforming hedge funds in their portfolios with 'alternative beta' funds, he said.
CFM launched the alternative beta fund 'Institutional Systematic Diversified' (ISD) in January 2014.
The fund, which is made up of futures, equity market neutral and risk premia components, returned just under 14 per cent in 2014, Mr Jordan said.
"[Super funds] can use ISD as a tool to replace their disappointing hedge fund returns, but they don’t need to replace the ones that they’re satisfied with," he said.
Reflecting on the hedge fund sector, he said it is "unlikely" there is as much as $3 trillion of alpha "out there in the world".
"If the beta world is $50 trillion, say, and there's almost $3 trillion in potential alpha, you’re making the statement that there's around five per cent of alpha," Mr Jordan said.
There is "probably" one per cent of alpha available in the world, but whether there is five per cent is a "tough proposition", he said.
"The disappointment [of investors] is due to that. You’ve had too much money pursuing too little real alpha available."
However, responsibility for the poor performance of hedge funds ought to be shared among investors and managers, he continued.
"[Large investors] should not be surprised that their $500 million investment at wonderful terms of one [per cent on assets under management] and 15 [per cent on outperformance] and improved liquidity terms did not turn out to be real alpha," Mr Jordan said.
Hedge fund managers who are delivering true alpha do not need to change their fees, he said. Instead, they should be managing their capacity.
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