Daily Speculations

'Market Neutral' Funds: A Spec reflects on claims that market-neutral funds can tame volatility and generate alpha, and finds them either self-deceptive or hubristic. (2/5/4)

Market neutral funds strike me as being a double con. However, sometimes it's a con on the public and sometimes the con is self deception or hubris.

The first con is the claim that they can tame volatility and fully understand correlations. Was not this the self-deceit of delta hedging/ portfolio insurers before Oct '87 and LTCM? As Vic implied, in the world of Sharpe ratio being king, is not the incentive to feign controlling volatility great. Was not this the con that enabled Enron to achieve its height? He who controls history/volatility rules the world.

The second con, generally different from fund to fund, is that they generate alpha by some highly marketable but dubious strategy. But this is how they expose their hand, showing that it is not innocent over enthusiastic self-deceit. (R.D.S.)