Comments on: Exactly how bad was September for hedge funds? http://allaboutalpha.com/blog/2008/10/22/exactly-how-bad-was-september-for-hedge-funds/ Hedge funds, portable alpha, 130/30 and alpha-centric investing Fri, 19 Mar 2010 07:52:26 +0000 http://wordpress.org/?v=abc hourly 1 By: Luke Szyrmer http://allaboutalpha.com/blog/2008/10/22/exactly-how-bad-was-september-for-hedge-funds/comment-page-1/#comment-141730 Luke Szyrmer Mon, 10 Nov 2008 22:06:35 +0000 http://allaboutalpha.com/blog/?p=3583#comment-141730 I think long beta exposure is only part of the picture. The underperformance relative to the S&P500 index for all but the macro strategy is probably due to credit risks of the other strategies. Global macro, particularly when it's based on futures trading, isn't levered with credit, and isn't exposed to counterparty risk. They can essentially be independent of their prime brokers, and thus weren't hit with sudden rises in transaction costs, or the bankruptcy of their PB. I think long beta exposure is only part of the picture. The underperformance relative to the S&P500 index for all but the macro strategy is probably due to credit risks of the other strategies. Global macro, particularly when it’s based on futures trading, isn’t levered with credit, and isn’t exposed to counterparty risk. They can essentially be independent of their prime brokers, and thus weren’t hit with sudden rises in transaction costs, or the bankruptcy of their PB.

]]> By: Nick gogerty http://allaboutalpha.com/blog/2008/10/22/exactly-how-bad-was-september-for-hedge-funds/comment-page-1/#comment-140277 Nick gogerty Tue, 28 Oct 2008 12:55:39 +0000 http://allaboutalpha.com/blog/?p=3583#comment-140277 Have to agree with Bill on that on. Low correlation doesn't mean it never rains in hedge fund land. Have to agree with Bill on that on. Low correlation doesn’t mean it never rains in hedge fund land.

]]> By: Bill aka NO DooDahs! http://allaboutalpha.com/blog/2008/10/22/exactly-how-bad-was-september-for-hedge-funds/comment-page-1/#comment-139707 Bill aka NO DooDahs! Thu, 23 Oct 2008 14:56:25 +0000 http://allaboutalpha.com/blog/?p=3583#comment-139707 All of those look like pretty low betas to me. Less than 0.5. They really should be proud. En serio! Low correlation is low correlation, regardless of outliers. Even a TOTALLY uncorrelated return series (which the above aren't, obviously, at least not totally) would still be expected to have an occasional down month at the same time as the overall markets. Usually the stringent definition of "absolute return" refers either to (1) lack of a benchmark index, such as using RF+ or some fixed number for the watermark, or (2) pursuit of return without a volatility-adjusted context. (2) is more rare and I've only seen it used in that context for managed futures/CTA trading. The ridiculousness (R.R., you listening?) of thinking "absolute return" means "never a down year" should be left to those who are, sadly, incapable of understanding a more nuanced argument. All of those look like pretty low betas to me. Less than 0.5. They really should be proud. En serio! Low correlation is low correlation, regardless of outliers. Even a TOTALLY uncorrelated return series (which the above aren’t, obviously, at least not totally) would still be expected to have an occasional down month at the same time as the overall markets.

Usually the stringent definition of “absolute return” refers either to (1) lack of a benchmark index, such as using RF+ or some fixed number for the watermark, or (2) pursuit of return without a volatility-adjusted context. (2) is more rare and I’ve only seen it used in that context for managed futures/CTA trading.

The ridiculousness (R.R., you listening?) of thinking “absolute return” means “never a down year” should be left to those who are, sadly, incapable of understanding a more nuanced argument.

]]> By: Walt French http://allaboutalpha.com/blog/2008/10/22/exactly-how-bad-was-september-for-hedge-funds/comment-page-1/#comment-139660 Walt French Thu, 23 Oct 2008 06:06:14 +0000 http://allaboutalpha.com/blog/?p=3583#comment-139660 Most of the time we quants do these types of regressions, we first subtract an appropriate "risk free" rate of return that explains how a pure T-Bill investment gets a bit of return each month. For many hedge funds, we could do something clever like subtract the T-Bill AND three times the spread of LIBOR over bills, to account for the typical leverage arrangement. If you did that, you'd explain why these funds get "steady" returns when the S&P is neither up nor down, and you might make the underlying low-beta return line even more clear-cut (with less noise around the fitted line). Many hedge funds only look good after fees because of mis-measurement... they inherently offer very little value-add, but merely play with futures to create option-like returns that mask the underlying risks or market exposures. Most of the time we quants do these types of regressions, we first subtract an appropriate “risk free” rate of return that explains how a pure T-Bill investment gets a bit of return each month.

For many hedge funds, we could do something clever like subtract the T-Bill AND three times the spread of LIBOR over bills, to account for the typical leverage arrangement.

If you did that, you’d explain why these funds get “steady” returns when the S&P is neither up nor down, and you might make the underlying low-beta return line even more clear-cut (with less noise around the fitted line).

Many hedge funds only look good after fees because of mis-measurement… they inherently offer very little value-add, but merely play with futures to create option-like returns that mask the underlying risks or market exposures.

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