Ron Surz, president and CEO of PPCA Inc., has been involved with evaluating fund managers for pretty much his entire professional career, so when he talks about fund evaluation he knows what he’s talking about. Surz is so fed up with the current methods of differentiating one fund from another that he’s made a five-minute video about it. Now, it is a silly video to be sure. One of the main characters is a big-headed, buck-toothed man talking to an expressionless woman whose face speaks to him from his TV.
“This humorous movie envisions a future where Clone Wars (played by Hypothesis Testing) replaces the due diligence Charade (played by Sham Research),” Surz wrote in a brief synopsis. “You’ll laugh at the clones clashing with the evil genius, a metaphor for the war of beta versus alpha. It’s five minutes of futuristic merriment and enlightenment, with a message that rewards the viewer with insights you can use right away. Gene Roddenberry would be proud of this trek; Bernie Madoff, not so much.
“This video exposes the charade of fake hedge fund due diligence. Despite the well-documented flaws in hedge fund peer groups and indexes, researchers continue to rely on them. Hedge funds cannot be accurately assembled into peer groups because they are unique. The definition of “unique” is “without peers.” Intermediaries know better, and their clients certainly deserve better. A few of the conscientious have abandoned peer groups altogether in favor of gut instinct, but there is a superior alternative in a science that can be relied upon. The science is hypothesis testing. We test the hypothesis “performance is good” by comparing it to all of the possible returns that could have been earned in executing the manager’s unique strategy. Hypothesis testing is depicted in the movie as a contest against the manager’s cyberclones, i.e. computer-generated doppelgangers.”
Ron will also be moderating a panel at HedgeWorld West 2013 on how allocators measure alpha.