Factor-based alternative beta has been around for a year now (Merrill introduced their product in October, 2006) and the actual results are much more interesting than those obtained by Edhec.

On a daily basis, the corrlelation between the HFRX- which reports daily- and the various alternative beta indices provided by Merrill, Goldman, Stonebrook, etc. is in the mid-80’s. Moreover, they have substantially outperformed their benchmarks.

Thus far, it seems factor-based alternative beta has delivered what it promised. The interesting question is: “how should alternative beta be used?” Well, it can be used as a hedge to create a “pure alpha” portfolio, it can be used in a core/satellite design, or it can be used to gain exposure to the systemic returns of the broad hedge fund industry.