Traditional investments are highly constrained because they can only go long, they’re forced to overdiversify and they’re confined to narrow strategy catagories (e.g. large cap value). In contrast, the broad hedge fund indices represent the value of being able to go long and short, concentrate positions, and employ a variety of styles. In a similar fashion, 130/30 relaxes the long-only constraint, and diversified beta funds like Bridgewater’s All-Weather or AQR’s Diversified Beta relax the narrow-strategy constraint.

It may be that the true contribution of alternative beta isn’t the ability to track these indices, its the performance pickup that comes from relaxing investment contraints. Discuss.