Absolute returns for hedge fund returns have been lackluster for several years now. In this conversation, Raphael Douady, Professor of Quantitative Finance at Stony Brook University, and Michael Rulle, founder and CEO of MSR Investments, speak with CFA Institute’s Paul Kovarsky about the sources of the disappointing performance, and about the measures that hedge funds can take in order to improve their course. Filmed on February 14, 2019 in New York. Watch more Real Vision™ videos: http://po.st/RealVisionVideos Subscribe to Real Vision™ on YouTube: http://po.st/RealVisionSubscribe Watch the full video by starting your 14-day free trial here: https://rvtv.io/2O1CIs9 About Real Vision™: Real Vision™ is the destination for the world’s most successful investors to share their thoughts about what’s happening in today's markets. Think: TED Talks for Finance. On Real Vision™ you get exclusive access to watch the most successful investors, hedge fund managers and traders who share their frank and in-depth investment insights with no agenda, hype or bias. Make smart investment decisions and grow your portfolio with original content brought to you by the biggest names in finance, who get to say what they really think on Real Vision™. Connect with Real Vision™ Online: Twitter: https://rvtv.io/2p5PrhJ Instagram: https://rvtv.io/2J7Ddlw Facebook: https://rvtv.io/2NNOlmu Linkedin: https://rvtv.io/2xbskqx Brighter Reality for Equity Hedge Funds | The Exchange | Real Vision™ https://www.youtube.com/c/RealVisionTelevision Transcript: It is true that equity hedge funds really do, from a risk-adjusted point of view, properly measured-- we can get into that if you want to. It really is true that hedge funds on the whole, on a risk-adjusted basis, properly measured, do outperform mutual funds. And that shocked me. But when I just read stuff, and looked at stuff, and measured stuff, I found that that was true. And so I want to get that point in. I can describe what I think it is, but I place-- Please do. Oh, right now? OK, OK. All right. You're familiar with target volatility. A fancy way of saying that is intertemporal risk parity. I love using that phrase because that's very easy. Target volatility is size your investment. If the market is more volatile, then you reduce your investments. Less volatile, you increase your investment to try to keep the volatility constant. In other words, you want your volatility of your portfolio constant. And by the way, I'm not even sure why you would do that outside of the equity world, other than just, you want to just manage your volatility. So I can understand that. But there is a market where, when you do that, it outperforms not doing that. And there have been studies going back-- there have been lots of studies over lots of markets, and it kind of blows your mind. But if you do what's called target volatility, or try to maintain a constant volatility of the portfolio, which means you really-- it's not unlike what portfolio insurance was, except the magnitude of it relative to the size of the investment is minuscule. But when you-- say you want to maintain a 15% constant vault in the S&P 500. That will outperform, on a legitimately-calculated Sharpe ratio perspective-- tails, and return over drawdown, the whole thing-- it will outperform over the last 15 years, over the last 30 years, over the last 80 years.