Passive vs. Active Investment in Hedge Funds

Oct 26th, 2006 | Filed under: Alternative Beta & Hedge Fund Replication

By: Sandra L. Manzke, MAXAM Capital Management
Published: 2006

Here’s a question: is a passive investment in alpha-producing hedge funds an oxymoron?

If a return stream can be replicated with a passive investment, then isn’t it beta?  This is certainly the case when it comes to index investing.  But doesn’t the very existence of a risk premium on a defined “asset class” (we hate using this term to describe hedge funds) mean that there are systematic risks that earn a market-appropriate level of compensation? 

Unfortunately, this article doesn’t really provide answers.  But at least it raises the right questions. 

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Related Posts

1. Factor Modeling and Benchmarking of Hedge Funds: Can Passive Investment in Hedge Fund Strategies Deliver?
2. Are Hedge Fund Fees a Bargain? And Other Conundrums of Balancing Active & Passive Management
3. Is “Active/Passive” another term for “Alpha/Beta”? Not quite.
4. Passive managers spark space race with launch of new satellites
5. Hedge Funds, Active Management, and the Asset Allocation Decision: A Descriptive Framework

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