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Consistent with results seen in both DM and EM, active management excess returns in FM exhibit a declining standard deviation of alpha since the inception of the category. While an increase in market efficiency is a plausible explanation for this trend, another significant factor is the role of asset dispersion. In contrast with the downward sloping excess return line in the FM-only classification, hybrid EM-FM funds exhibit a roughly flat excess return line since 2009.
This finding can in part be explained by greater dispersion in the returns of the underlying equities available to the hybrid category. EM has significantly higher return dispersion than both FM and DM in virtually every year over the last decade. Extreme asset dispersion is often attributed to fundamental restructuring and economic dislocations. Given EM’s more mature reform trajectory, this delta with FM could be due to differential development.
Caglar Somek has fifteen years of equity research and portfolio management experience with a focus on emerging and frontier markets. Caglar is formerly the CIO of Caravel Management LLC and has also worked for Goldman Sachs Asset Management, Salomon Brothers Asset Management and Credit Suisse First Boston.
Caglar is fluent in Turkish and French, is a CFA charterholder and holds an MA in International Economics and Finance from Brandeis University as well as a BS in Economics from Universite de Paris Dauphine.
Alexander Schay is a Managing Director at Ultima Thule, an equity research company focused on developing markets and an equity partner at WK Associates, a boutique energy consulting firm with a specialization in emerging market oil and gas.
Alex holds both an MS in Risk Management and an MBA from the Stern School of Business at New York University.