Schneeweis on Alpha, the SEC and Hedge Fund Replication
| Apr 11th, 2007 | Filed under: Alternative Beta & Hedge Fund Replication, CAPM / Alpha Theory, Hedge Fund Industry Trends, Hedge Fund Regulation | By: Alpha Male |
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This is the second half of Alpha Male’s recent interview with Professor Thomas Schneeweis, Editor of the Journal of Alternative Investments, director of the Chartered Alternative Investment Analyst designation and founder of the Center for International Securities and Derivatives Markets (CISDM) at UMass. In this segment, Schneeweis addresses some of the burning questions facing the hedge fund industry today, including: Is alpha finite?, Does hedge fund replication work?, and most importantly, What the heck is the SEC thinking?
AM: Tom, do you believe the world is running out of alpha?
By the mid 90s, we knew that hedge funds and CTAs had underlying sources of return – that in fact every strategy was not actually unique. We knew that, because the market for ideas is efficient, everyone who traded equity long/short was trading essentially the same strategies in the same markets, using the same process. You see, everyone considers themselves to be different, but it’s amazing how when a particular strategy makes money, all the traders in the strategy make money; and when a particular strategy loses money, all the traders in that strategy lose money.
So we knew there were fundamental sources of risk that these strategies all accessed: market risk, credit risk, liquidity risk, and more exotic risks. That was an important finding because if you knew what risks were part of each strategy, you could put them together into a well diversified portfolio. More…
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[...] To summarize his approach and corroborate his thinking, Main cites a quote from an interview conducted by AllAboutAlpha.com with Professor Thomas Schneeweis of the University if Massachusetts a few months ago: “(Is Alpha finite?) It depends on how you define alpha. If alpha is generated by some wizard who wakes up in the morning and has the unique ability to give you a return absent of any risk, then that probably never existed. But if you are talking about an individual who is able to add together a unique set of risk opportunities that aren’t easily accessible via other sorts of vehicles – then that alpha does exist.†[...]
[...] To summarize his approach and corroborate his thinking, Main cites a quote from an interview conducted by AllAboutAlpha.com with Professor Thomas Schneeweis of the University if Massachusetts a few months ago: “(Is Alpha finite?) It depends on how you define alpha. If alpha is generated by some wizard who wakes up in the morning and has the unique ability to give you a return absent of any risk, then that probably never existed. But if you are talking about an individual who is able to add together a unique set of risk opportunities that aren’t easily accessible via other sorts of vehicles – then that alpha does exist.†[...]