The question in 2012 is not whether hedge funds (and other alternative investment vehicles) can attract pension funds, but how they should go about it. Alternatives managers will benefit most from the heightened interest of pension funds if they address the continuing concerns of their pension fund colleagues. For example, pension fund managers are well aware that investment in exotic and illiquid products is something hedge funds do, and they know that these products can help make a quick exit impossible.

Emerging managers want and need investors and investors reputedly are sitting on cash looking for opportunities. So why aren't the two managing to get together?

"We're seeing a cycle where China is now a leader, and experiences the biggest rates of marginal growth in the world. That is already a game-changer which has had a disproportionate impact on emerging markets than developed ones."--Louis-Vincent Gave

After a survey of recipients of the UCITS Alternative Index, the UAI Industry Survey Q1 2012, Alix Capital reports that majorities expressed satisfaction with the current level of allocation for certain strategies: commodities, emerging markets, forex, and macro global strategies. But there was a lot of interest in increasing allocations to CTAs, equity market neutral, and volatility-based strategies. The strategy that receives the largest negative response (largest intended reduction in portfolio allocation) is fixed income.

One crucial takeaway from SEI's latest is that "the quality of operations is a major consideration in institutions' screening and evaluation of hedge funds." Eighty percent of respondents agreed with the observation that "operational strength is a hallmark of an institutional-quality hedge fund." One quarter of those say they agree "strongly." Only three percent disagree.

Some managers of HFT or algorithmic funds must have felt some relief upon the arrest of Sergey Aleynikov in July 2009, his conviction in December 2010, or his imprisonment the following March. Programmers in the financial world were put on notice that criminal prosecution was among the possible consequences were they to treat their knowledge of their employer's edge as a marketable commodity. Thus, the news on Friday [February 17, 2012] that Aleynikov is now a free man came as something of a jolt.

From Lynne Feldman, Director of Marketing at the CAIA Association: David Rogers, CA, CBV, Founding Partner, Caledon Capital Management, discusses constructing an institutional portfolio with private equity, what premium above public markets institutional clients are seeking from private equity, and infrastructure investing. Mr. Rogers spoke with Wendy L. Coleman, CAIA, CFA, FRM, Senior Advisor to the [...]

In September 2011 the IMF estimated that roughly half of the Euro Zone's $9 trillion in outstanding government debt was now at 'heightened credit risk'. This is a crisis which billionaire investor George Soros has described as, "...a more dangerous situation now than in 2008.

Lisa Suennen of Psilos Group discusses the new wave in healthcare venture capital: improved care quality while reducing costs.

Comparing the different editions of the Axioma Quarterly Risk Review for 4th Quarter 2011 leaves some fascinating insights. For example, it is becoming more difficult over time, in much of the world, for investors to create significant diversification within the (domestic) equity portion of their portfolio, because the correlations of stock pairs have been increasing.

Because of the furor over ABACUS and analogous transactions, the legislative mandate of the Volcker rule came to include a section 619, telling the SEC to ban underwriters or sponsors of asset-backed securities from engaging “in any transaction that would involve or result in any material conflict of interest with respect to any investor in a transaction arising out of such activity.” On Monday, February 13, the final day for comment on the proposed rule, some of the more fascinating comments spoke to this issue.

In keeping with our mission to provide a marketplace of ideas, today's post presents two views of a paper that deals with the banking rules, which directly affect the core of the financial services industry and its future stability.

James Rickards is a global expert on financial markets and global security. In this exclusive interview, he discusses some of the massive threats our financial markets face (internally and externally) and explains why he thinks "….all the tools in modern finance are basically false science. "

The Global Association of Risk Professionals has surveyed risk managers, analysts and academics to get a sense of the implications of the demise of MF Global Holdings for the role of risk managers. Its findings add to a growing sense that the firm’s last chief executive, Jon Corzine, a former New Jersey Governor and U.S. Senator, was an edge-dwelling trader at heart, eager (as Dealbook put it in an analysis in December) to play a “hands-on role in the firm’s high-stakes risk-taking;” indeed, a man enmeshed in a “romance with risk.”

Data on the endowments of institutions of higher learning shows a significant spread between the performance of the largest endowments and the lagging performance of the smaller. The return that endowments received on their use of alternative strategies, too, depends in part upon the size of the endowment doing the investing. Endowments under $25 million in assets under management made only 9.5 percent on this asset class in FY 2011, while those with more than $1 billion in AUM made a 16.9 percent return hunting in the same jungles.

Alpha is often found in the company of those investors who are earliest in seeing the first hints of future events unfolding. Topsy is a new source of that capability.

From Lynne Feldman, Director of Marketing at the CAIA Association: Introducing CAIA Conversations, a series of interviews with leading alternative investment experts that showcases current viewpoints on the alternative assets covered by the CAIA curriculum. The series launches with Erik L. Knutzen, CAIA, CFA, Chief Investment Officer, NEPC, who comments on the changing role of alternatives strategies [...]

Infrastructure is a perpetual investment, whether it's rebuilding old, existing underpinnings in developed markets or building the foundations that turn an emerging nation into a developing one. Preqin looks at this lesser known investment that underpins many alternative portfolios.

2011 was the year private equity managers learned to accept that what they got even if it wasn't always quite what they wanted. Investors talk about what they want and need in 2012.

The right question is not what were they thinking, but what were they feeling? Get organized about detailing what feelings are being acted out and you’ve landed on the missing link in risk prediction.

Emerging OTC derivatives in the emerging markets of Latin America and Asia are just one more sign that these countries are growing up.

"Farhaz Miah, of Preqin, sets out the numbers for private real estate fundraising in 2011, showing that the market continues to suffer from the impact of the 2008 crisis. He notes, also, that debt strategies have become increasingly popular, both in specifically debt-strategy funds and in opportunistic funds that employ debt strategies as part of a broader structure."

AAA sat down with Alex Gurvich and Jim Mitchell, both of The Rockledge Group, an investment advisory firm headquartered in Brooklyn, New York. We began by discussing the mid-January launch of a new product that gives the long-short equity strategy an ETF format, and ended up talking about a good deal else, such as the inherent superiority of ETFs over mutual funds, and Pimco's recent recognition of that fact.

Since transaction costs and the illiquidity of certain portions of an index make ideal tracking impossible, there will be a difference between the return of a tracking ETF, such as those tracking ETFs that are structured as UCITS in Europe, and the return of the underlying index or benchmark. The European Securities and Markets Authority maintains that investors should be informed of the factors that are likely to affect the size and the volatility of this difference.

Alpha Hunter Khiem Do talks about Asia and where the alpha is from his perspective.

The Hartford (CT) CFA Society recently hosted a workshop on “Pension Risk Management and Governance.” The discussion proved to be mostly, though not exclusively, about ERISA and about how plan sponsors may arm themselves against the sorts of litigation it may inspire. Moderator Martin Rosenburgh, who is both an attorney and a financial analyst, and currently [...]

Peter Urbani looks at Cornish Fisher and modified VaR as a function of skewness.

"...If all the money that's ever been invested in hedge funds had been put in treasury bills instead, the results would have been twice as good..." This is the astonishing finding of Simon Lack in his book "The Hedge Fund Mirage".

Two scholars affiliated with the Center for European Economic Research, drawing upon European data between 2000 and 2008, maintain that PE backed companies do not suffer from higher bankruptcy rates than their control group of comparable companies. Their paper also addresses the relationship between bankruptcy risk on the one hand and the syndicated (or, conversely, the stand-alone) nature of a PE deal. It finds no significant relationship.

The SEI asked institutional investors in hedge funds what was the number one reason for their inclusion of such funds in their portfolio. The most popular single choice was "absolute return." On the other hand, if you combine the numbers of the distinct answers that involve limiting the downside, then the percentage of respondents who gave some risk-management focused answer is 56 percent. As SEI says, this is "a marked cultural shift from the early days of hedge funds, when many investors focused on their potential to produce outsided returns."

Infrastructure is a basic need for any country, no matter what size. However, investing in infrastructure funds has been scant since its peak in 2007. That may be about to change.

In Singapore, some of the synthetic ETFs involve considerably more exposure to uncollateralized counterparty risk than the 10 percent or less that UCITS would allow. Singapore has, for example, the iShares MSCI India tracker, which has a 20 to 25 percent exposure. But Celent sees a possibiliuty that laxity will prove a winning move vis-a-vis Hong Kong.

In spite of what the media might have us believe, it isn't quite the end of the world as we know it, particularly as it applies to European private equity.

AIMA, in a report sharply critical of the proposed European Union financial transaction tax, sets out the way in which the tax could burden businesses, and their consumers, to a degree far greater than the proponents contend. After all, any single product may pass through several stages between raw materials and final consumer, as there are several steps between farmer harvesting wheat and retail outlet, such as Tesco, selling pasta. Businesses at every stop along the way (farmers, wheat processers, pasta extruders) will naturally want to hedge their own operational risks in the financial markets, so the price of the finished product will reflect the repeated imposition of the FTT.

First, an investor (according to a new white paper on due diligence from Merlin Securities) must decide what kind of strategy it is to which he wants exposure, and generate a list of managers who practice that strategy. Thereafter he can focus on each firm on that list looking at each of the three (qualitative) components of management, and subjecting his impressions to a variety of (quantitative) tests. Tripartite divisions seem to come into play a lot.

It seems that Patrick Byrne is interested in using a lawsuit filed in Canada in October 2011 as an opportunity for contesting the substantive merits, that is, providing evidence that the conspiracy exists as described and that Nazerali’s part in it was accurately portrayed in the various webpages of Deep Capture (called “chapters” for some reason). That may well prove healthy.

The fortunes of the world’s ultra high net worth (UHNW) individuals have surpassed $25 trillion. This is an astonishing figure, made even more so when contextualized against the value of the entire world's economic output (GDP) which, in 2010, was 'just' $63 trillion.

Godfrey Cadogan's formula, linking high-frequency trading, bubbles and crashes all into one formula of extreme simplicity (or "parsimony" as Cadogan puts it) leaves our reporter wondering: does the rendering of facts as a formula make them clearer, or does it just create a misleading patina of precision? Emanuel Derman recently warned of the overly simple models of finance economists, and perhaps this is a new token of that type.

A recent study, in which Steve Kaplan of the University of Chicago collaborated with Bob Harris of the University of Virginia and Tim Jenkinson of Oxford, addressed fund-level performance using data from Burgiss Group. Kaplan said this study indicates that “private equity has performed remarkably well.” In the period 1990 to 2008, a dollar in PE returned to investors 300 to 400 basis points a year more than a dollar in the equities of the S&P 500, net of all fees. This, if accepted, still leaves the question of the relationship of PE funds/firms to one another. Are they all the same?

If every fund is number one, then no one is number one. Irina Zeltser examines performance rankings in private equity.

IMF economist Manmohan Singh, in a recent working paper for the IMF, makes a case that pledged collateral is a critical financial lubricant, and that since the collapse of Lehman in September 2008 there has been a significant and troubling decline in its supply. Certain measures intended by regulators to enhance financial stability may in fact undermine it, by worsening the supply/demand mismatch, in effect creating a grey market for this pledged collateral.

Google, Apple, eBay and Amazon have a combined market capitalization of almost double the top five world retailers combined. We investigate the alpha opportunities with these dot-com giants.

This is a column of non-sequential thoughts including but not limited to topics appearing on AllAboutAlpha emphasizing the heartbeat behind the statistics which add up to alpha (definition expanded by the author to suit their purpose). When the relevance isn't apparent at first, lubricate with a bit of your favorite drink, herb or pharmaceutical, and things will make a lot more sense. It's all good. Doug Friedenberg ran a convertible arbitrage hedge fund in a previous century and learned first hand most of the mistakes asset managers can make. In the current century, he works to finance small to mid-sized businesses with a particular specialty in cross-border trade and letters of credit, which sometimes involves emerging/frontier markets. No word yet on plans for next century; maybe a posthumous autobiography.

Celent says that both the IT world and the financial markets long assumed that the latter had to employ the former in a “batch mode.” A firm would process trades through the day, recording these in a data base. Then at the end of the day, programs that could manipulate this data in search of exploitable patterns would operate on the day’s results as a batch. That is the mode of operation that “has become increasingly obsolete.”

The Mathema report is full of cautions, and indeed adopts a quite generally gloomy tone. The markets, it tells us, don’t lend any credence to the political fixes that have been offered for the eurozone and especially for its peripheral players. If the fixes did have credibility, then the PIIGS’ 10-year government benchmark yields would have been falling significantly of late vis-à-vis the 10 year German Bund yield. But there has been no such fall.

Guest columnist Charles Hage looks at hedge fund risk and discusses the long and the short of it.

If the actual results of the Korea Composite Stock Price Institute fitted a normal distribution (a "Bell curve,") then the index would record a daily loss larger than 3 percent only once every 1,219 years. In fact, it records such a loss once every 2.3 years. To fit the extraordinary real-world volatility of KOSPI and many other Asian markets, institutional investors especially should consider structured equity products that explicitly target a level of volatility.

At present, 21 percent of the world’s wealth belongs in the developed economies, but by 2020 that figure will have risen to 30 percent, according to a new report.

Distressed debt strategies have long been bedeviled by the shifting and thus unpredictable nature of the law of avoidance, or fraudulent conveyance, in the U.S. Perhaps it is, as some have said, because the law was written for a simpler time, and an industrial rather than a post-industrial country.

Our holiday bug in your ear is an encouragement to practice the Golden Rule in the year to come.