LETTER TO THE EDITOR: IBBOTSON IS RIGHT

You recently published a letter by Daniel Zibman of Tremont Advisors Inc. criticizing a Dec. 1 opinion piece by Roger G. Ibbotson and a related research paper authored by Mr. Ibbotson, Stephen Brown and myself. Before printing Mr. Zibman’s letter under the boldly derogatory headline, “Ibbotson is wrong,” you should have checked some basic facts.

Mr. Zibman’s criticism of our work is simply wrong. Even a cursory reading of our research paper (“Offshore Hedge Funds: Survival and Performance, 1989-1995”) would have revealed this. Given his confusion, it is important to clarify our study.

We analyzed the annual performance of 608 offshore funds that reported their performance during the 1989-95 period to Offshore Funds Director, the only data source during that time that contains verifiable information about defunct funds as well as currently operating funds. A comparison of our data to the widely used Managed Account Reports data, as well as to the list of hedge funds supplied to us by the Securities and Exchange Commission suggests our data are broadly representative of the hedge fund industry.

Since our data have three times as many funds and extend over twice the number of years as the data in the Tremont Advisors study Mr. Zibman cites, I am not surprised that we come to different conclusions on the relation between size and performance.

Mr. Zibman disagrees with our assertion that hedge funds seek “superior performance.” We found that our universe of hedge funds produced positive risk-adjusted returns over the time period of study. If that is not superior performance, I would like to understand Mr. Zibman’s definition of the term.

Both value-weighted and equal-weighted portfolios of hedge funds in our sample had positive “alphas” as well as Sharpe ratios that exceeded that of the S&P 500. Mr. Zibman takes us to task for not crediting hedge fund managers for lower volatility. Perhaps he doesn’t understand that the Sharpe ratios we report in our paper
explicitly scale performance by volatility.

We separated managers into 10 self-reported styles, as well as into nine styles based upon correlated movement of past returns. Of the 10 value-weighted self-reported categories of hedge funds we studied, nine had positive alphas over the seven-year period. Of the nine performance-based styles, we found that all had positive alphas over the period. Mr. Zibman may not believe that quantitative-based methods for identifying manager style are useful in the context of hedge funds, but most people in the business of performance evaluation do.

Our study shows explicitly that comparisons within style are crucial to evaluating performance. The style of the manager appears to explain a lot — including whether or not performance can be expected to repeat or reverse in the following year.

He also seems to think that our paper implies that managers do not matter. Despite the headline atop the Dec. 1 opinion piece in InvestmentNews, our paper does not say that — nor does any of our past research imply it. Indeed, our academic research through the 1990s on mutual funds identified clear evidence of differential manager skill.

I am sorry that Mr. Zibman refuses to accept our failure to find that size and age cannot forecast superior returns, but perhaps he should read our paper and understand our methodology before urging us to “go back and do it right the next time.”

And before printing a self-serving letter such as his with a misleading headline, InvestmentNews should exercise some judgment.

WILLIAM N. GOETZMANN

Professor

Yale School of Management

New Haven, Conn.