David,

Great topic. I hope to hear more from you on this given your background and unique perspective.

My feeling is that the total worldwide supply of alpha is shared between the “hedge fund community” (however we define it) and the rest of us. Lars Jaeger and Christian Wagner of Partners Group have an interesting way of calculating worldwide alpha based on an arbitrary proportion they said would be exploited by hedge funds…

http://www.allaboutalpha.com/blog/2006/10/19/

Factor Modeling and Benchmarking of Hedge Funds: Can Passive Investment in Hedge Fund Strategies Deliver?

David Hsieh and Bill Fung also argue that alpha per investor is shrinking. But I’m still not convinced that the proportion of all markets that is “inefficient” is actually getting smaller. New geographies and new types of securities constantly replenish the alpha pool. So like “peak oil”, I’m not sure I totally buy into “peak alpha” theory…

http://www.allaboutalpha.com/blog/2006/10/04/

Peak Alpha Theory 

http://www.allaboutalpha.com/blog/2006/10/07/

“Peak Alpha” Theory: Perspectives from Around the Blogosphere

http://www.allaboutalpha.com/blog/2006/11/23/

Peak Oil Theory Springs a Leak - Is “Peak Alpha” Theory Far Behind?