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Report: “Exposure yardsticks may provide little insight about a fund’s alpha potential”15 May 2008
A research paper by Morgan Stanley (available in the Morgan Stanley research dossier at AllAboutAlpha.com) reminds us that dollar-weighted exposure is not synonymous with beta-weighted net exposure. But the paper, another in a series by Marty Leibowitz and Anthony Bova, also argues that the beta-weighted net exposure doesn’t really tell us a lot about the potential information ratio (alpha/tracking error) of the fund. To gauge the potential IR of a fund, one should instead look at the ratio of “active” long positions to “active” short positions - or what Leibowitz and Bova call the “active ratio”. The active ratio, they argue, is more descriptive of the risk/return dynamics of a fund than the more recognized dollar-weighted or beta-weighted net exposure. They say the Active Ratio can reveal how long/short funds and 130/30 funds are really just first cousins:
“Active” long and short positions are defined as those that deviate from the benchmark (see posting covering a previous paper by the authors on this topic). So making a lot of active decisions when moving the long book from 100% to 130% would yield a far different active ratio depending on the activeness of the short book. The following chart from the paper illustrates how dollar-weighted exposure, beta-weighted exposure and active exposure can all differ for the same fund:
In this example, the dollar-weighted net exposure is 60%, the beta-weighted exposure is 50% (since the longs apparently have a lower average beta than the shorts), and the active ratio is 0.67 (60%/90%). Of course, the active ratio of a long/short fund only indicates the potential for alpha. A high active ratio means little unless you also know that the manager has a bunch of good investment ideas up his sleeve. Given the same set of alpha-producing investment ideas, two funds with very different amounts of active short and active long exposures can actually have the same information ratio - as long as the ratio of active short exposure to active long exposure is the same in both funds. In other words, given the same set of investment ideas, a fund with active long exposure of 90% and active short exposure of 60% will produce the same information ratio as a fund with an active long exposure of 120% and an active short exposure of 80%. As long as the ratio of the two numbers remains constant, the IR remains the same. So scaling up the active long and short exposures increases alpha and tracking error in the exact proportion required to keep IR stable (as in the table below). But while the same active ratio leads to the same IR (ceteris paribus), it doesn’t say anything about the absolute size of the alpha or the IR. That part, as usual, depends on the quality of the investment ideas. This particular paper arbitrarily assumes that the alpha of the best idea on the list is 5% and that the alphas of the remaining stocks decline linearly to 0.4% for the 50th best idea. According to the authors, the relationship between the active ratio and the IR is governed by other factors as well. A larger number of positions requires more scraping the bottom of the barrel for investment ideas and thus leads to a lower IR for any given active ratio. Still, the IR would be the same regardless of the activity ratio chosen by the manager. The paper dives a little deeper into the implications of this axiom, but Leibowitz and Bova tie it altogether in the following simple lesson:
Download full paper here (with free registration).
Comments »Does “Sentiment Beta” beget “Sentimental Alpha”?14 May 2008
Behavioral finance has often been touted as the successor to the CAPM since it aims to explain how the grand old model doesn’t hold up under empirical analysis. Unfortunately, behavioral finance has so far lacked a unifying theory of its own capable of galvanizing the field of finance. Still, Baker and Wurgler borrow from the lexicon of the CAPM to propose a measure they call “Sentiment Beta”. As P&I points out, some big names have taken notice. Bruce Jacobs of Jacobs, Levy tells the newspaper:
At first blush, “sentiment beta” sounds kind of redundant. After all, doesn’t beta itself capture market sentiment? If sentiment rises, the market rises. And if the market rises, high-beta stocks rise anyway, right? In fact, the relationship between high volatility stocks and investor sentiment is almost linear. The higher the stocks volatility, the more its price becomes driven by “sentiment” (i.e. the higher the “sentiment beta”). The chart below divides stocks into buckets depending on their “speculative” nature with the most highly speculative bucket on the right.
But when it comes to future returns, things aren’t quite as intuitive. As the duo say in their 2007 paper on the topic, periods of high investor sentiment actually foreshadow lower future returns - a finding sure to warm the cockles of a contrarian investor’s heart. The authors point out the irony in this finding:
As above, they divided stocks into deciles ranging from what amount to value stocks (”safe, easy to arbitrage”) to what amount to growth stocks (”speculative, hard to arbitrage”). As the following chart from the paper shows, speculative stocks (on the right) had a much lower excess return in the month after one with high investor sentiment.
Not surprisingly “safe, easy to arbitrage” stocks reacted to market sentiment in the opposite manner. They were more likely to outperform the market in a month after one with low investor sentiment (as, for example, sentiment may have crested and some sort of mean reversion might be at play). Behavioral finance is often held out as a way to analyse (or at least temper the analysis of) individual stocks. But how does this relate to broader issues of portfolio construction and manager selection (our interest on this website)? As Baker and Wurgler warn us, sentiment beta is very much intertwined with traditional market beta:
This is important to us because any time you modify or extend the definition of beta, you get a new alpha - in this case, a sentimental alpha.
Comments »Research says funds of funds not just “multi-manager funds with extra fees”13 May 2008
There are some in the hedge fund industry that look at the fees charged by funds of hedge funds as the equivalent to Puddy’s “optional overcharge“. However, a new study by one fund of funds supplier aims to dispel this notion once and for all. (Says Puddy: “Yeah. That’s right.”) As hedge funds began to ride a wave of interest around the turn of the century, there seemed to emerge a general consensus among those new to the asset class that funds of funds were the most appropriate way to invest. The argument made a lot of intuitive sense as the idiosyncratic risk posed by hedge funds could be ameliorated through diversification. And so the fund of funds became a dominant species in Hedgistan. But as we reported last week, there now seems to be a subtle shift back to single-strategy hedge funds. In fact, discussion about the potential weaknesses of funds of funds (fees, illiquidity of underlying funds and a lack of transparency into the underlying funds etc.) began a few years ago with the rise of the multi-strategy fund. Multi-strategy funds argued that, like funds of funds, they too were diversified. But, they said, they had lower aggregate fees and could dynamically allocate between strategies at the drop of a hat. In addition, they argued that since they were familiar with the underlying holdings in each strategy, they could manage risk in a more holistic manner. And so it was that multi-strategy funds seemed to be gaining the upper hand. Until a few months ago… The Winter 2007 Journal of Alternative Investments included a paper by Giresh Reddy, Peter Brady and Kartik Patel - all of New Jersey-based Prisma Capital called “Are Funds of Funds Really Multi-manager Funds with Extra Fees?” The paper (available here at Prisma’s website) makes a cogent argument in favour of the much maligned funds of funds. In other words the answer, according to the authors, is “No, funds of funds are more than just multi-manager funds with extra fees”. They point to the fact that the performance divergence between hedge fund managers is larger than the performance divergence between different hedge fund strategies (in contrast to what is encountered in traditional long-only investment classes). They observe:
They go on to compare the effects of re-allocating each month from a) the worst manager to best manager (a process at which funds of funds excel) and b) worst strategy to best strategy (a process at which multi-strategy funds excel). According to their model, shifting strategies each month yields very little additional return - as illustrated in the following chart from the paper:
But when money is re-allocated between the worst and best managers in the universe (something the authors posit a fund of funds is more qualified to do), then the picture changes…
The trio makes a number of other arguments in favour of funds of funds, including:
On the sticky issue of fees, the authors contend that multi-strategy funds do charge more than single manager funds - albeit not a ”second layer” like a fund of funds. But what about the fact that some managers in a fund of funds could earn a performance fee even though the overall fund may be down on the year? (see related posting on this phenomenon.) After all, isn’t it far better to calculate performance fees once, not across many funds? The authors run some numbers to show the total affect of this phenomenon amounts to only 16 bps per annum in additional costs (or only around 10bps when you factor in high water marks). While some may consider funds of funds to be like expensive training wheels for hedge fund newbies, there may be method the madness after all according to this paper. And so it seems that the death of funds of funds may have been overstated. Perhaps there is still hope for this modest, trillion-dollar industry. As Puddy would say, “High five!”
Comments »Requiem for another attempt at hedge fund regulation12 May 2008
The SEC set the example with its attempt to make hedge fund register back in 2006. Now the California Department of Corporations’ attempt to register hedge funds seems to have also met an untimely demise. HedgeWorld chronicles the whole sorry affair in detail… As HedgeWorld points out, the proposed regulation would have required all funds not already voluntarily registered with the SEC to register with the Golden State. But to its surprise, the government of California found out that hedge funds would just leave the state to avoid the hassle (who could have known, really…). In what appears to be a move to save face, California government officials said that “in light of the ongoing actions of federal regulators”, they would hold off on any further action on the regulatory front. Apparently, new regulations were “premature”. (Indeed, the time to drive hedge funds out of your state is later, not now). This would all make sense if it weren’t for the fact that federal regulators don’t actually have much happening the way of “ongoing actions“. They too abandoned their registration plan a couple of years ago and instead enacted a rule that simply made it officially illegal to break the law (see related posting). Maybe the Californian regulators where talking about some other “federal regulators” - like the federal regulators in Myanmar or something. In a related item, SEC commissioner Paul Atkins is resigning from the commission last week. For more on Atkins - including his dispassionate and balanced view of hedge funds - see our posting on the SEC meeting during which the latest super-watered-down version of hedge fund oversight was passed. As HedgeWorld reported last week:
Atkins is right. Accusing hedge funds of being nefarious because some crack-pot calls himself a hedge fund is like indicting gun owners - not for the misdeeds of gun-toting criminals - but because someone merely pretended to have a gun. (Or like invading a region because one of its leaders needed some respect and therefore faked having weapons of mass destruction.) The key lesson being that “it doesn’t matter if you’re making the whole thing up, we’ll pretend you were serious and go after the people you were impersonating.” Here’s a good example of how the SEC’s new hedge fund anti-fraud rule is being used. According to HedgeWorld:
This tragic story leaves little doubt about the tough actions required by the SEC: regulate Latin-themed-restaurant-hedge-funds! Do it now - before someone mistakenly eats some of that 6-alarm salsa or suffers some untimely mariachi injury.
Comments »One of portable alpha’s originators says concept has evolved, in some cases, into something “vastly different”11 May 2008PIMCO’s Chris Dialynas knows portable alpha. In fact, commentators such as author Peter Bernstein generally agree that PIMCO essentially invented portable alpha back in the 1980s in the form of the firm’s “StocksPLUS” and “BondsPLUS” products (see related posting). Dialynas joined PIMCO way back in 1980 - surely before several of PIMCO’s current junior analysts were even born. So when he cautions the world about the movement he helped create, we’re probably best served by listening closely to what he has to say. He is the author of the epilogue to the new book “Portable Alpha Theory and Practice” by Sabrina Callin (see related posting). The chapter is ominously titled “Portable Alpha - The Final Chapter: Schemes, Dreams, and Financial Imbalances: ‘There Must Be More Money’” and it amounts to something of a sanity check on the current state of portable alpha. The entire chapter can be downloaded here at AllAboutAlpha.com. While cautious, Dialynas doesn’t actually question the underlying rationale behind alpha-beta separation or portable alpha itself. Instead, he expresses his concern that the techniques often used to create or isolate pure alpha (leverage and derivatives for example) have led to unacceptable risks to the financial system (think: Richard Bookstaber’s “Demons of Our Own Design” - see related posting). Says Dialynas:
He goes on to explain how few investors are familiar enough with the statistical dimensions of many new and complex investment products and how “compressed spreads and low volatility” actually imply higher risk, not lower risk. In addition, he explains how the current economic environment in the US (the “war on terror”, the Fed, and household debt) coupled with ”financial schemes that incorporate highly leveraged strategies” are in his words “very binding on public policy.” In conclusion, he expresses his frustration that his invention has been used as a cover for more questionable pursuits:
But rather than giving up on innovations such portable alpha altogether, Dialynas urges both investors and policymakers to be more realistic about return expectations:
Download the entire chapter here at AllAboutAlpha.com. (Excerpted with permission of the publisher John Wiley & Sons, Inc. from Portable Alpha Theory and Practice: What Investors Really Need to Know. Copyright (c) 2008 by Pacific Investment Management Company, LLC. This book is available at all bookstores, online booksellers and from the Wiley web site at www.wiley.com, or call 1-800-225-5945.)
Comments »Newsreel from the Danube10 May 2008
(Note: as usual, free registrations may be required for some of these stories. Rest assured, they’re all free though - we’re far too cheap to actually pay for stuff.) NACM launches three 130/30 funds: CIO says “We believe 130/30 investing will become an integral part of institutional investors’ portfolios in the years ahead.” Hedge funds banking on IPO route: Hedgeweek says that the spike in UK hedge fund managers’ interest in IPOs is a result of an easing of LSE listing rules. Fund managers overmarket, underperform as competition hits: Watson Wyatt says fund managers are trying too hard to wow their prospects. California Firm Preps ETF Hedge Fund: Now we can have an “ETF hedge fund” to go with your “hedge fund ETFs.” The $3-billion prophet of doom: Canada’s leading news magazine says “There are many who will reflexively point to Paulson’s success as yet more evidence that the hedge fund sector is somehow predatory. In reality, it is just the opposite, and it’s time we dispensed with the knee-jerk disapproval that continues to dog the industry.” Investors stand by 130/30 funds: Like Hillary Clinton once did, investors have so far chosen to “stand by their (130/30) man” Pension worry from new accounting rules: Pending regulatory changes in Europe have some worried that pensions will have to yank assets from alternative investments. Comas wants funds of hedge funds to drop the ‘diversification’ tag: Commerzbank’s hedge fund of funds business says the industry has lost sight of need for actual returns. Investors expect hedge funds to raise $200bn this year: Despite the news about the pending death of hedge funds, things have apparently been worse. The activities of the “new shorts”: Analyst says that “institutionalized, mainstream short-selling trade that is practiced by well capitalized hedge funds and traditional money managers…are much less prone than they have been in years past to flee when positions move against them, so the short-covering rallies fuelled by panicked short liquidation have become somewhat scarcer.” That’s all for now. Viszontlátásra!
Comments »Alpha-centric investing described as a “seismic shift”9 May 2008
Now the landscape is changing. Or perhaps more accurately, investors are now expressing a desire to try their hand at portfolio construction using basic ingredients such as cash, beta, and alpha. This FT article (”Equity fund outflows bring need to adapt“) is a must read for anyone who thinks we’re nuts. The newspaper describes the changes facing the asset management industry as nothing less than a “seismic shift”. Kevin Parker, the head of Deutsche Bank’s $800 billion money management business tells the FT:
The FT also cites Jim McCaughan, CEO of Principal Financial Group as an advocate of alpha-centric thinking:
Continues the FT:
On its surface, the growth of 130/30 strategies seems to run counter to this trend. After all, the whole purpose of this strategy is to combine more alpha with beta - not to separate alpha from beta. But we suggest that the mere recognition of an alpha component and a beta component (often generalized as the “beta one” characteristic of these funds) makes 130/30 a step forward and worthy of the alpha-centric moniker. According to the FT, the seismic shift may change the landscape forever. Just in case you read the STA report released last week (see posting) and believed that hedge funds are the only asset class with the capacity to shake the entire financial system, note that this article ominously concludes:
The possibility that Q1 was only a tremor will surely keep Parker, McCaughan and other asset management CEOs up at night - and ready to stand in a secure doorway or take refuge in a bath tube when the “Big One” hits.
Comments »HF and PE managers square off on implications of credit squeeze9 May 2008
Samper was a member of a panel discussing the different views taken by hedge funds and private equity funds on the recent credit crisis. Catherine Lewis, a partner with London-based private equity firm Parish Capital, said there was now a significant alpha-generation potential for small private equity funds that focus on niche sectors. In this segment, she said, transactions are less likely to be over-leveraged and are therefore more likely to flourish in the current credit environment. Lewis said that the illiquidity crisis facing credit markets was leading to a marked slowdown in new investment activity, a return to more conservative deal structures, postponed exits and smaller IRRs.
Comments »“Portable Alpha Theory & Practice”: Exclusive chapter downloads at AllAboutAlpha.com8 May 2008
Impressed with what we saw in the book, we called up its author Sabrina Callin and have now arranged to provide you, the loyal AllAboutAlpha.com reader, with two of its chapters for free. Today, we give you chapter one - the introduction by Callin that provides a good summary of the entire book. And next week, we’ll post the Epilogue by Callin’s PIMCO colleague Chris Dialynas. But for those who are totally pressed for time, here’s a “summary of the summary” reflected by the chapter titles and a few key excerpts from chapter one:
Comments »Research puts price on hedge fund “illiquidity premium”6 May 2008Liquidity (or lack thereof) is a perennial issue in the hedge fund industry. How much should investors expect to be compensated for the lock-ups that hedge funds often require? And does such a premium really count as “alpha”? Pierre Laroche of Innocap Investment Management (see related posting on Innocap’s hedge fund replication work) tells us of a study he recently conducted that comes to a pretty definite conclusion about the illiquidity premium. Laroche is the co-author of three books on derivatives and risk management.
Much has been done in recent years to better measure and price illiquidity. These developments had a positive impact on risk management practice. For example, some interesting liquidity-adjusted VAR models have been developed recently. There has also been quite a bit of discussion on this topic on the pages of AllAboutAlpha.com (e.g. “Liquidity Alpha“, “Liquidity Insurance“) At Innocap, we recently finished an interesting study that proposes a way to quantify the cost of illiquidity and adjust the risk-return profile of an illiquid asset. Our model aims at reproducing the trading methods and market environment of typical (median) CTA hedge funds. (We could have chosen other types of hedge funds. This one is used for illustrative purposes only). The model integrates the impact of liquidation delays, accrued bid-ask spread (BAS hereafter) and increased volatility (feedback effect). This is an improvement over other models, which only take into account one or two of these factors.
Comments »Study is first to examine the secondary market for stakes in hedge funds5 May 2008
But there is one rough approximation of such a market for hedge funds. And now one enterprising academic has used data from that market to determine how much investors value things like lock-ups and various other characteristics of hedge funds. That secondary hedge fund market is Bahamas-based “Hedgebay”. Every month, Hedgebay brings together buyers and sellers of stakes in (mostly closed) hedge funds. The funds trade at a discount or premium to their net asset value (NAV) depending on various factors. In a study published in March, Tarun Ramadorai of Oxford University used 10 years of Hedgebay trading data to determine the effect of those factors on the premium or discount for a stake in one of the funds traded on the market. Over the 10 year period analyzed, buyers have been paying a premium for these stakes in closed hedge funds. The chart below was crated using data from the study and shows the premia and commissions paid for about 870 hedge fund stakes (excludes about 70 blow-ups that generally sold at around a 50% discount).
Comments »Report says hedge funds, portable alpha and 130/30 all leading to (financial) climate change5 May 2008
Although the 130/30 market has grown since then, it remains in the very low hundreds of billions globally. Yet in a report released a few days ago, the Security Traders Association (STA) blames recent market volatility, in part, on 130/30 funds. Says the report:
High velocity hedge funds seem to be primary focus of the STAs concern. But 130/30 isn’t the only institutional investment strategy at which the STA points a finger. The use of derivatives (for example, for portable alpha) is also identified as a growing source of market volatility by the report:
Comments »Survey of hedge fund professionals: 130/30 “minor discussion within larger context”4 May 2008Regular readers may remember our survey of attitudes toward 130/30 funds last August. Since that survey, several others (e.g. Merrill Lynch, Vodia Group) have come up with similar numbers - about 15-17% of institutions actively investing in 130/30 and another 25-30% considering investments in the next 12 months. Today, Kathryn Wilkens tells us of a recent survey of practitioners (members of the Chartered Alternative Investment Analyst Association) on this topic in our regular instalment of “Alternative Viewpoints”. A true advocate of alternative investments herself, Kathryn Wilkens received a Ph.D. in finance at the University of Massachusetts in 1998, and received a Center for International Securities and Derivatives Markets (CISDM) fellowship in 1997. She was on the CAIAA’s advisory board from the program’s inception in 2002 though 2005, and is now the CAIAA’s Director of Curriculum. Alternative Viewpoints - powered by CAIA
Last month, 440 CAIA members responded to a survey on 130/30 funds and I presented the results at Terrapinn’s 130/30 conference in Santa Monica. The survey questions were structured around two main themes frequently discussed here at AllAboutAlpha.com:
When I posed the first question to the attendees at the Terrapinn conference, all but one responded that a standard long-only equity index such as the S&P 500 index or the Russell 2000 is the appropriate benchmark for 130/30 funds. Yet Dow Jones, Credit Suisse, and S&P have all recently developed 130/30 indices (see related AAA postings Dow Jones joins the 130/30 Index Parade, S&P follows CS into 130/30 index business, 130/30 Indices: True indices or like playing chess against a computer?) Two of these indices are classified as a type of “Strategy Index” with another being a so-called fundamental index.
Comments »Does shift away from funds of funds mean diversification is dead?4 May 2008
Now it appears they weren’t kidding. Bloomberg cites Pensions & Investments data that shows the proportion of US pension assets invested in funds of funds fell from 57% to 49% over the 2002-2007 time period. Meanwhile, Euopean funds of funds seem to be doing just fine - this according to Global Pensions. The magazine reported back in March that:
Comments »1X0/X0 and the hunt for African alpha1 May 2008
But is it really alpha? To address this question for us, we welcome the following guest contribution from Helena Conradie of major South African money manager Sanlam Investment Management. Helena is the Head of Sanlam Investment Management’s equity quant boutique that manages over R21 billion. She is a CFA charterholder and has an MSc in Applied Mathematics Cum Laude from Stellenbosch University.
In just more than 18 months people all over the world will flock to South Africa to attend the world cup soccer event, paying generously to see amazing flair and display of talent. But would they consider South Africa as the location for amazing alpha? At any given time there is a finite amount of alpha available for fund managers to hunt. And as we all know, it is “all about alpha!” The diversity of stock returns across all sectors (the cross-sectional volatility) is a good indication of the presence of alpha. So does the South African rainbow provide the alpha hunter with enough diversity?
Comments »Small US hedge funds fail to reach orbit, fall back to Earth.30 April 2008
Apparently, large hedge funds - the kind that get all the media attention when they perform poorly or have to suspend redemptions - are actually shutting down less frequently than the average fund. HFN reports that teeny-weeny funds with less than US$15 million of assets had an attrition rate in Q1 that was more than twice as high as their proportion of all funds in the HFN database. Tough times for the small fry? Possibly. But HFN doesn’t say whether this level of turnover is actually out of the ordinary. Assets of $15 million translate into $300,000 in management fees - barely enough to keep one or two people and a small office afloat. So, as with small restaurants, high attrition may simply be par for the course. Does this portend doom for the industry? Probably note. It simply shows that it’s getting harder and harder to reach the “critical velocity” required to put a new hedge fund into orbit. It’s as much an asset raising issue as it is an investment performance issue (although the two are obviously related). Starting a hedge fund is often viewed as a route to easy riches. However, many start-up managers soon realize they’d rather make more and work less back at the prop desk.
Comments »More media malarkey30 April 2008Canada’s National Post reports that the FBI is now warning of hedge fund fraud (”FBI Warns of Hedge Fund Fraud“). But in actuality, FBI Director Robert Meuller gave a 2,000 word speech last week in which “hedge fund” appeared only once - after a lengthy discussion corporate fraud, public corruption, insider trading, mortgage fraud and Conrad Black. The one reference to hedge funds…
…Not quite the “warning” trumpted by the Post.
Comments »After launching 130/30 index, S&P says best yardstick is actually a long-only index29 April 2008
We were skeptical - noting that 130/30 amounted to simply leveraging the alpha potential of a strategy and was not really a strategy on its own (see posting). But we didn’t confine our skepticism to S&P. We also raised questions about the approach taken by Credit Suisse (see posting). We reasoned that since both indices were based on proprietary models, their performance was entirely contingent on the performance of each company’s underlying investment decisions. While S&P stopped short of saying its index was “representative” of 130/30 funds, a published index like this is obviously meant to be used as some kind of benchmark for 130/30 managers. But now another S&P report says the best benchmark for 130/30 managers is actually an appropriate long-only index…
Comments »Like US President, European Parliament also getting biased advice on hedge funds28 April 2008
While the conclusions were largely the same as the PWG (transparency guidelines etc.), the document takes a far more skeptical view of the industry (which, of course is no surprise given that the PWG committees were private sector committees). Here are some examples:
Comments »130/30 Manager: Don’t call us quants28 April 2008In a quick addendum to yesterday’s posting on the growth of fundamental 130/30 strategies, here is an example of one company that aims to distance itself from the pure 130/30 quants by adding an “intuitive” element to quantitative decision making. BNY Mellon Asset Management launched a 130/30 fund for European investors a couple of weeks ago that it says attempts to “harness alpha in a slightly different way than other quantitative managers by placing emphasis on fundamentals and economic intuition, rather than depending on more empirical methods.” While it’s not quite a slam against more quantitative fund, it does reflect the unease asset management marketing departments have with the association 130/30 has developed with one of last year’s sorriest alternative strategies.
Comments »The new face of 130/30?27 April 2008
While P&I describes this growth as “drastically slower” than last year, the numbers are still relatively small (53 managers), so it’s tough to draw any definite conclusions from these numbers. But we were were struck by what P&I said next: “…with most asset gains picked up by fundamental managers…” While fundamental strategies are gaining, quants still continue to dominate 130/30-land. As we’ve suggested before, it’s difficult to disentangle the poor performance of quant strategies in general from the performance of 130/30 as an investment approach. A rise or fall in 130/30 assets says more about managers’ view of the potential returns from beta, their own skill-level, their clients’ demands and their own particular business model than it does about the merits of short extensions per se. As a half-way point between long-only and market neutral funds, short extensions are simply an more aggresive form of active management, not an exotic new approach to investing.
Comments »Is “Active/Passive” another term for “Alpha/Beta”? Not quite.24 April 2008In December, we told you about plans for a new series of mutual funds constructed by combining active and passive components (see posting). Boston-based FundQuest had always been content to provide the plumbing for the mutual fund industry - manager selection, back office support, marketing services and sales support to financial advisors. But the firm announced last week that it has finally launched its first mutual fund based on these ideas- called ”ActivePassive Portfolios” (see sales brochure). While this sounds like an oxymoron, it’s a great example of alpha/beta separation extending slowly, but surely, into the retail marketplace. As a sort of pre-packaged alpha-beta solution, it reminds us of the Janus institutional offering launched last year (see related posting). Here’s what they say about the “optimal” ratio for the offering:
Comments »Author of New Book: For more return without more downside risk “there are only two options”23 April 2008
Now someone has finally brought many of these concepts together in one place. “Portable Alpha: Theory and Practice” (US link) edited by PIMCO’s Sabrina Callin has just hit bookstores. If you read Peter Bernstein’s “Capital Ideas Evolving” (see related posting), you may recall that PIMCO is considered to be one of the early pioneers in portable alpha strategies. Naturally, we’re working our way through it right now and are so far impressed with the holistic nature of the content (including contributions by Rob Arnott, Bill Gross and several PIMCO managers). Yesterday, AAA media partner HedgeWorld ran an interview with Callin for its premium subscribers. With permission from our friends at HedgeWorld, we have re-printed the interview in its entirety below. But before you read the interview, here’s a quick footnote. It appears that Portable Alpha has a lot of fans in the UK and Singapore. A Google search of this book returns the publisher’s country-specific websites in the following order: UK, Singapore, US, Germany, Canada. A flagrantly un-scientific observation for sure. But curious nonetheless…
Comments »Pennsylvania is also “Portable Alpha Country”23 April 2008
The AP reports that the Pennsylvania State Employees Retirement System has been getting a lot of fan mail after it announced a 17% return last year. Reports AP:
John Winchester, the plan’s CIO, tells AP that his goal is to “whether a variety of different market environments”. It appears he may stick with the nearly 25% allocation to hedge funds and private equity for some time. As the AP points out:
The SERS website breaks down the numbers: | |||||||||||||||||||||||||||||||||||||||||||||
Whether one is referring to a 1X0/X0 fund or to some other long/short variant like a market neutral fund, there is often an implicit assumption that the “net exposure” provides all the insight required into the return potential of the fund. For example, many commonly assume that 130/30 funds are “beta neutral” and therefore that the “30/30″ portion will generate pure alpha. But what if that short-extension was just offsetting? To use an extreme example, if it was 30% long the S&P and 30% short the S&P, then there would be no alpha.
Pensions & Investments published a 
In a 
You have to give regulators an “A” for effort. We’re not totally anti-regulation here at AllAboutAlpha.com. But we do find in curious how most, if not all, attempts to regulate hedge funds seem to have eventually come to a crashing halt. 
In recognition of our legions of loyal readers in Budapest, Hungary, we are broadcasting live from the “Pearl of the Danube” today. (Actually, no - we don’t quite have “legions” of Hungarian readers. But yes, today’s newsreel was produced on the banks of the Danube where Alpha Male was sharing his two cents on alpha-centric investing with a meeting of European asset managers.)
We have always argued that actively-managed mutual funds are essentially a marketing package for two fundamentally different formations: a large deposit of beta and a vein of pure alpha. Unable to travel either the peaks and valleys of beta or the undulating topography of pure alpha, mutual fund companies long ago found a neutral territory that seems to have satisfied investors worldwide for over 50 years.
(Madrid, April 25) - The former head of the pension for a large US state has suggested the value provided by funds of funds has increased as a result of market turbulence. Al Samper, former Head of Virginia Retirement System told a gathering of the Chartered Alternative Investment Analysts Association in Madrid recently that protection against the idiosyncratic risks of single strategy hedge funds is more important than ever for institutional investors. He also told the audience that a long term investment horizon was a prerequisite for adding alternatives to a traditional portfolio.
Last week, 
Special to AllAboutAlpha.com by: Pierre Laroche, Managing Director - R&D Innocap Investment Management 
Several commentators on these pages have wriiten about the hedge fund liquidity premium. While it makes intuitive sense that investors demand compensation for locking in their money, it can be notoriously difficult to put a price on hedge fund attributes such as this. When the only decision facing an investor is binary - to invest or not to invest - it is difficult to get a picture of the full demand curve for a particular fund. Unlike in most other markets, investors don’t bid up or bid down the price of a hedge fund in an open market.
Last year, we published a couple of articles on the somewhat Malthusian possibility of a global shortage of stocks available for borrowing. (”
Special to AllAboutAlpha.com by: Kathryn Wilkens, Ph.D., CAIA, Director of Curriculum, the 
On Friday, 
Last September, 
Special to AllAboutAlpha.com by: Helena Conradie, SIM Equity Quants
After all the negative press about hedge funds over the past few months, one can be excused for believing that every other hedge fund is blowing up. In fact, 
Back in November S&P launched its 
Since The President’s Working Group (PWG) released it’s “Best Practices for Hedge Funds” Report (
Pensions & Investments 
The term “portable alpha” is still a relatively new addition to the popular lexicon. As we’ve written on these pages, the term itself seems to morph on a regular basis to encapsulate the literal “porting” of alpha between asset classes to the combination of hedge funds and swaps. Issues like active management fees, regulation, risk measurement, and market efficiency seem to weave their way in and out of the various definitions of portable alpha. 
Pennsylvania is not only the latest battleground between the Democratic presidential contenders, it’s also one the biggest battleground between traditional long-only investing and alternative investments.