Over the past 10 years hedge funds have beaten the market. Does this mean they’re skilled, or just lucky? We can confidently say there’s one reason for hedge funds to exist: they generate excess returns by actively choosing sectors. Timing the broad market is difficult, just as it’s difficult to predict specific sector and stock movements. Hedge funds, especially generalists, make sector bets more often than not. Is there enough return dispersion for this strategy to outperform the market? Let’s look at benchmark returns for each of the main S&P 1500 sectors: Thus, we can answer our first question: sector...