Jaeger: Hedge Funds Usher in “Atomic” Age of Investing

Feb 12th, 2007 | Filed under: CAPM / Alpha Theory, Portable Alpha & Alpha/Beta Separation | By:
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You don’t need a Ph.D. in physics to understand hedge fund replication. But Lars Jaeger has one just in case. And he used it masterfully today to draw an analogy between the model of the atom in the 19th century (a random mass of various particles) and the common paradigm understood today including a nucleus (containing most of the atom’s mass) and a number of electrons orbiting it.  Until now, he argues, hedge funds have been viewed as a random mass of alpha, beta and error terms. But a new paradigm is now emerging that aggregates betas into a nucleus orbited by various alphas.  The same could be said for active long-only investing in our view.  Until now, long-only management has also been a mass of alpha and a set of betas (dominated by market beta).

Jaeger’s Partners Group has developed replication portfolios to mimic the performance of various hedge fund strategies. The returns of these replication portfolios actually beat all hedge fund strategies except distressed (which, according to Jaeger, contains a lot of alpha and is therefore difficult to replicate).  Jaeger says that long/short managers, on the other hand, are particularly susceptible to replication.

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