In a world of problematic future market returns, where can you find excess returns or alpha - at least in traded markets?

Definitely not your active fund managers or risk premia strategies. 

Active fund managers have shown an inability to consistently generate excess returns beyond fees. And risk premia strategies have you bear the risk to earn the premia (not alpha), and risk premia are very hard to predict.

This brings us to hedge funds.

First, there is no alpha in the average hedge fund. The barriers to entry are relatively low, leading to many players with little skill. The alpha is in the outliers, so the managers' selection is important.

Second, the availability of information (the internet) has removed any big pools of alpha. This doesn't mean there is no alpha. Market efficiency is an ideal, not a reality. Just that alpha now appears in smaller, transient pockets across the financial markets.

This alpha fragmentation tends to favour emerging hedge fund managers over large managers. Emerging managers are smaller and better 'match' the alpha pockets. They also have better incentives than large managers resting comfortably on their management fees.

The big multi-strategy managers bring emerging managers into pods to reflect this reality of the alpha coming from emerging managers. While they have been very successful in raising capital, they are hard to get into and are taking advantage of this demand by increasing fees and locking capital up for longer (up to five years).

Are you…