Hedge fund managers that focus only on company valuations are doing it wrong, according to Robert Prince, co-CIO of Bridgewater Associates — the top firm in AR Magazine’s sister publication Institutional Investor’s 11th-annual ranking of the world’s 100 largest single-manager hedge fund firms by assets under management. In a nutshell, Prince insists, fundamentals--focused managers often fail to justify their fees because they are too exposed to the markets.
“A lot of managers put a lot of time into picking securities,” he says. “But at the end of the day, they all have the same exposure.” When the markets move, these portfolios move with them, and any expertise gets canceled out, explains Prince. “If you don’t go through a systematic process of balancing your risk, including accounting for beta, no matter how many good decisions you make in the security selection process, it is overwhelmed.” In other words, good...