Jaeger Replies to Kat’s Scepticism on Alternative Beta
Feb 26th, 2008 | Filed under: Alternative Beta & Hedge Fund Replication, Guest PostsLars Jaeger’s recent commentary on “alternative beta” (see posting) raised the ire of Professor Harry Kat (see posting). Today, Dr. Jaeger responds to Kat’s protests by highlighting the “inconsistencies” in his arguments.
Special to AllAboutAlpha.com by: Lars Jaeger, Ph.D., CFA, FRM, Partner, Partners Group
In his reply to my recent contribution at AllAboutAlpha.com, Harry Kat says that he agrees with “several points” in my argument (I only made a few key points anyway). Specifically, Kat seemed to agree that factor models capture mostly the “traditional beta” in hedge funds. Further, he seemed to agree with my argument that “hedge fund replication isn’t really about replicating hedge funds. It is about replicating hedge fund indices.” And he goes on to re-state many of my original points.
We seem to be in agreement on some very fundamental points. That is good news to me, as Harry has not always agreed with much what I have said in the past. However, he then suggests that there is a need to “fill in the picture” as my comments were only “part of the hedge fund replication story.”
I surely never claimed to know the entire hedge fund replication “story”. But what he actually provides us with – in order to “fill in the picture” – is merely a performance comparison between the ART Index (Goldman Sachs’ replication product) and the PG ABS Index (the Partners Group Alternative Beta Strategies).
In doing so, Harry is inconsistent in at least three ways. Firstly, he is inconsistent in the way he applies fees in his analysis. While he compares the PG ABS net of fees, he chooses to report the performance of the ART index gross of fees, a rather important difference as hedge fund investors surely understand.
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- Jaeger predicts year of alternative beta, the death of “black boxes.” Advocates “scenario based” portfolio construction.
[...] One of our primary objectives at AllAboutAlpha.com is to encourage debate and discussion on emerging topics in investment management. That is why we cover new academic studies, surveys, counter-intuitive viewpoints and controversial opinions. Today, we bring you the latest in an ongoing debate between two well-known and highly regarded figures in the hedge fund industry, Professor Harry Kat of the Cass Business School and Dr. Lars Jaeger of fund manager Partners Group (previous postings: Jaeger…Kat…Jaeger…). Although Kat and Jaeger differ on many issues, they share a common interest in furthering the field of finance through frank, collegial and mutually-respectful debate. And judging from our traffic, so do you the reader. [...]