Measuring Hedge Fund Investments With ‘Conviction’

Hedge funds have a two-fold reputation – a good year can put you well ahead of the market, but hedge funds can also have truly frightening drawdowns. By creating a series of strategic indices that track global hedge fund performance against the market, Novus Research Chief Research Officer Stan Altshuller and research associate Yuanjie Zhang have found that highly concentrated portfolios are the cause of both high alpha and high volatility, but that looking at ‘conviction’ instead of concentration can keep most of the benefits while making the painful drawdowns less likely.

“The typical hedge fund has on average 58% of its long-equity assets invested in its top 10 positions compared with only 17% for the iShares...