As an insider at a large L/S equity hedge fund I would say that for sharp practioners there is plenty of alpha. Beyond my deep knowledge of our robust, diversified, consistent performance the spectacular performance of various quantitative groups — the most visable being Renaissance — completely settle this argument.

The challenges for a fund like ours (and I would imagine its similar for the quants) are 1) how to find very intelligent, creative, motivated individuals and 2) how to keep them motivated after a few $10M paychecks. The simple fact is elite individuals are rare and they have other opportunities. For example, the weath creation in software and internet companies seems to make us hedge fund practioners distinctly 2nd class.

It is interesting to ask oneself - Does the existence of $100M in personal alpha (say 30% of delivered alpha perf) for some elite individuals AFFIRM or CONTRADICT the “efficiency” of financial markets?

In the period up to 2000 “indexing” was in vogue, as was long speculation. And as markets tend to do, the exxageration of one idea engineers its own downfall. Is not the “IPO-process” a Boggle-style indexing killer? If most of the world money is index invested, cant I just IPO at absurd valuations, tie-up most of the float and force “market-cap” weighted indexers to buy at my price? So the system engineered that and we have moved on.

I think how one defines alpha “scarcity” at present is something fruitless (like - CAPM, efficent market, significance-test) that will occupy academics time in place of common-sense. But I think there are related questions which are interesting:

Do we think the current environment, with so much hedge fund money is very healthy for our capital markets? (YES!, so many pricers, so much diversificiation, so many innovators)

Do we think more hedge fund money is healthy? (YES!)

Finally, might we be sowing the seeds of some correlated unwind that we cannot envision?

To that I answer - yes. But we certainly cant run prior stats or some equation to quantify this! And it probably will not be so simple as “interest-rate” or volatility run up.