GTAA Morphs into Hedge Fund Space
| Nov 14th, 2006 | Filed under: Hedge Fund Industry Trends | By: Alpha Male |
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By: Rachel Alembakis, Global Pensions
Published: October 2006
The addition of active currency management to a portfolio is often referred to as Global Tactical Asset Allocation (GTAA). At the risk of oversimplifying the strategy, a GTAA manager over-weights countries she likes and under-weights those she does not. In essence, the manager runs a long/short overlay not too dissimilar to the equity overlays we have discussed here.
When these sets of over-weights and under-weights are isolated into separate portfolios and aggregated together in a pooled fund, the result is essentially a global macro hedge fund. This is a great example of how existing active management can be isolated, aggregated and delivered in a more efficient form: a hedge fund.
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[...] As you can see, this is really a half-step toward a pure alpha/beta approach. For example, the “Alpha” bucket actually contains a lot of beta simply because it includes active long-only managers. The portfolio construction process would therefore need to under-invest in “core” or risk having too much beta. It seems the “alternative” bucket can better be described as “alpha”. “Tactical” can be either high-alpha or low-alpha depending on the net market exposure. GTAA managers who have parceled off their active overlays into global macro-funds would be the first to say that trading beta can produce pure alpha as long as the portfolio remains market-neutral.   [...]