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Browse by CategoryHome » Category List » AUDIENCE: Financial professionals
LDI: The Quest for “Del Boca Vista”7 July 2008The results from a survey were released last week on a topic that will either interest you or bore you tears – Liability-Driven Investing (LDI). We’ve covered this topic here at AllAboutAlpha.com because one of its constituent parts is often a hedge fund or portable alpha strategy. More on the survey below. But first, if you do all you can to avoid this topic; you might be well served to give it a second chance. Try looking at it this way… Pension Liabilities: Del Boca Vista
Let’s say you’re Seinfeld’s Frank Costanza (George’s father) and you’re saving for a glorious retirement at Del Boca Vista, a well-manicured retirement community in sunny Florida. It’s 1998 and you calculate that your annual savings plus a few good hedge fund investments will cover the costs of that dream condo (to be built some time in 2011).
Comments »Goldman’s new “A.R.T.” HF-Replication-Mutual-Fund22 June 2008
The nuts and bolts behind “ART” are a state secret, but the fund’s prospectus describes it this way:
Comments »Non-market-cap indices dissed in Europe this week18 June 2008Rob Arnott, the outspoken proponent of “fundamental indexation” might want monitor what’s being said in Paris this week. Arnott is the owner of the patent for “non-cap-weighted indices” (see related posting). But IPE reports that Alain Dubois, the head of Lyxor Asset Management a SocGen subsidiary, told a conference audience:
Piling on was Tomas Franzen, head of AP2, one Sweden’s national pension funds who apparently added:
Arnott might not actually disagree with this assessment since he has often referred to fundamental indexation as simple common sense (see related posting). In either case, the value of his patents is probably doing just fine.
Comments »130/30 rationale, value, and “myths” covered in newly released slideware8 June 2008Earlier this month, Pensions & Investments held a tri-city 130/30 dog-and-pony show in San Francisco, Chicago and New York. And this week, they released several presentations given at the event. So if you happened to have missed the show when it came through town, you might be interested in seeing the slideware available here at P&I. Below we give you our take. John Power of Pyramis gave a succinct overview of the rationale, costs and benefits of 130/30 that also included what has probably become the most popular slide in any 130/30 presentation:
The key message, of course, is that you simply can’t bet against most names in the index in a significant manner. In our view, the difference between underweighting a 0.5% position by 0.5% and underweighting it by, say, 0.6% isn’t significant from an investment standpoint (some might argue the requisite introduction of short-selling brings with it some new operational issues).
Comments »Is an “integrated” 130/30 portfolio always better than a “combined” one?5 June 2008There seems to be a growing level of agreement that 130/30 is different than simply adding together a “100″ portfolio (e.g. an ETF) and a “30/30″ portfolio (e.g. a market neutral fund). Some practitioners have pointed to the “untrimness” of being long and short some of the same stocks (e.g. Jacobs & Levy - see related posting). But others such as First Quadrant’s Jia Ye have argued that adding a short-extension will not always be optimal even for the alpha-producing manager due to the potential volatility of the information coefficient (see posting). Today, guest contributor Srikanth Iyer, Senior VP and Senior Portfolio Manager, Global Systematic Strategies at Guardian Capital LP puts these two ideas together by exploring whether a so-called “integrated” 130/30 portfolio is always optimal. 130/30 “Combined” vs. “Integrated”: The Tail Wagging the Dog
The rapidly evolving landscape of 130/30 has seen many investment concepts used in interchangeable and often inappropriate ways. As more players enter this space, it’s likely that we will see a further dilution of these core concepts. The debate between a “combined” and “integrated” approach to active extension strategies is a classic example of how important concepts relating to return and risk are being bypassed to placate existing investment approaches. The demands of business development add further confusion to the discussion about 130/30 strategies. An “integrated” 130/30 portfolio is created using a mean-variance optimizer that uses the correlations between individual long and short securities to achieve an optimal mix for a given risk budget or ex ante tracking error. In contrast, a “combined” 130/30 portfolio combines an existing mean-variance optimized long only portfolio with an integrated 30 long/30 short portfolio - effectively, combining a long only beta adjusted return with a zero-beta market neutral return.
Comments »A “small-cap bias” in hedge funds themselves?21 May 2008
Earlier this week, the company announced the updated results of the same study. It came as no surprise to researchers that last year’s findings were reinforced. Young funds and small funds did better than their larger and older cousins. The chart below appears in the firm’s press release:
You don’t need to be a finance Ph.D. to see the parallels between this research and the work of Eugene Fama and Kenneth French on the “small-cap bias”. Apparently, small cap stocks aren’t the only small things that tend to outperform.
Comments »New 130/30 and “hedge fund replication” mandates bridge gap between alts and skeptical pensions20 May 2008
One of Sweden’s public pension plans, the EUR9 billion AP7, announced the news at a conference yesterday. Reports IPE.com:
Grottheim told the gathering that he could get “the same returns” by investing directly in the risk factors that tended to drive hedge fund returns. (see previous posting on AP7’s alpha/beta separation programme) But is this really the primary motivation for the move? Since hedge fund of funds returns are reported net of fees, it appears as though AP7 won’t be any better off after the shift. Granted, they won’t have to deal with the discomfort of making any fund of hedge fund managers rich (while they simultaneously aim to fund the retirements of hard working Swedes). But how does this shift really make life easier for the pension plan?
Comments »A review of recent 130/30 surveys19 May 2008
So is 130/30 the New Coke of asset management? Will we eventually pine for the “classic” version of our favorite active managers? This survey, for one, suggests not - only 14% of pensions thought 130/30 was a “passing trend”. This is another in a growing body of surveys on 130/30 (of which our 2007 survey with Terrapinn is a part). So we thought this might be a good time for a re-cap. Below is a quick list of all the 130/30 industry surveys we can immediately recall (in chronological order). If we have missed any, please let us know. 2006
Comments »Report: “Exposure yardsticks may provide little insight about a fund’s alpha potential”15 May 2008
A research paper by Morgan Stanley (available in the Morgan Stanley research dossier at AllAboutAlpha.com) reminds us that dollar-weighted exposure is not synonymous with beta-weighted net exposure. But the paper, another in a series by Marty Leibowitz and Anthony Bova, also argues that the beta-weighted net exposure doesn’t really tell us a lot about the potential information ratio (alpha/tracking error) of the fund. To gauge the potential IR of a fund, one should instead look at the ratio of “active” long positions to “active” short positions - or what Leibowitz and Bova call the “active ratio”. The active ratio, they argue, is more descriptive of the risk/return dynamics of a fund than the more recognized dollar-weighted or beta-weighted net exposure. They say the Active Ratio can reveal how long/short funds and 130/30 funds are really just first cousins:
Comments »One of portable alpha’s originators says concept has evolved, in some cases, into something “vastly different”11 May 2008PIMCO’s Chris Dialynas knows portable alpha. In fact, commentators such as author Peter Bernstein generally agree that PIMCO essentially invented portable alpha back in the 1980s in the form of the firm’s “StocksPLUS” and “BondsPLUS” products (see related posting). Dialynas joined PIMCO way back in 1980 - surely before several of PIMCO’s current junior analysts were even born. So when he cautions the world about the movement he helped create, we’re probably best served by listening closely to what he has to say. He is the author of the epilogue to the new book “Portable Alpha Theory and Practice” by Sabrina Callin (see related posting). The chapter is ominously titled “Portable Alpha - The Final Chapter: Schemes, Dreams, and Financial Imbalances: ‘There Must Be More Money’” and it amounts to something of a sanity check on the current state of portable alpha. The entire chapter can be downloaded here at AllAboutAlpha.com. While cautious, Dialynas doesn’t actually question the underlying rationale behind alpha-beta separation or portable alpha itself. Instead, he expresses his concern that the techniques often used to create or isolate pure alpha (leverage and derivatives for example) have led to unacceptable risks to the financial system (think: Richard Bookstaber’s “Demons of Our Own Design” - see related posting). Says Dialynas:
Comments »Survey of hedge fund professionals: 130/30 “minor discussion within larger context”4 May 2008Regular readers may remember our survey of attitudes toward 130/30 funds last August. Since that survey, several others (e.g. Merrill Lynch, Vodia Group) have come up with similar numbers - about 15-17% of institutions actively investing in 130/30 and another 25-30% considering investments in the next 12 months. Today, Kathryn Wilkens tells us of a recent survey of practitioners (members of the Chartered Alternative Investment Analyst Association) on this topic in our regular instalment of “Alternative Viewpoints”. A true advocate of alternative investments herself, Kathryn Wilkens received a Ph.D. in finance at the University of Massachusetts in 1998, and received a Center for International Securities and Derivatives Markets (CISDM) fellowship in 1997. She was on the CAIAA’s advisory board from the program’s inception in 2002 though 2005, and is now the CAIAA’s Director of Curriculum. Alternative Viewpoints - powered by CAIA
Last month, 440 CAIA members responded to a survey on 130/30 funds and I presented the results at Terrapinn’s 130/30 conference in Santa Monica. The survey questions were structured around two main themes frequently discussed here at AllAboutAlpha.com:
When I posed the first question to the attendees at the Terrapinn conference, all but one responded that a standard long-only equity index such as the S&P 500 index or the Russell 2000 is the appropriate benchmark for 130/30 funds. Yet Dow Jones, Credit Suisse, and S&P have all recently developed 130/30 indices (see related AAA postings Dow Jones joins the 130/30 Index Parade, S&P follows CS into 130/30 index business, 130/30 Indices: True indices or like playing chess against a computer?) Two of these indices are classified as a type of “Strategy Index” with another being a so-called fundamental index.
Comments »Like US President, European Parliament also getting biased advice on hedge funds28 April 2008
While the conclusions were largely the same as the PWG (transparency guidelines etc.), the document takes a far more skeptical view of the industry (which, of course is no surprise given that the PWG committees were private sector committees). Here are some examples:
Comments »Author of New Book: For more return without more downside risk “there are only two options”23 April 2008
Now someone has finally brought many of these concepts together in one place. “Portable Alpha: Theory and Practice” (US link) edited by PIMCO’s Sabrina Callin has just hit bookstores. If you read Peter Bernstein’s “Capital Ideas Evolving” (see related posting), you may recall that PIMCO is considered to be one of the early pioneers in portable alpha strategies. Naturally, we’re working our way through it right now and are so far impressed with the holistic nature of the content (including contributions by Rob Arnott, Bill Gross and several PIMCO managers). Yesterday, AAA media partner HedgeWorld ran an interview with Callin for its premium subscribers. With permission from our friends at HedgeWorld, we have re-printed the interview in its entirety below. But before you read the interview, here’s a quick footnote. It appears that Portable Alpha has a lot of fans in the UK and Singapore. A Google search of this book returns the publisher’s country-specific websites in the following order: UK, Singapore, US, Germany, Canada. A flagrantly un-scientific observation for sure. But curious nonetheless…
Comments »Research says shorting ETFs in a 1X0/X0 portfolio holds unique benefits7 April 2008
This was a concern raised last June in this MarketWatch article (see related posting, “So Much for Double Alpha”):
While it may be true that hedge funds are in the business of creating alpha, 130/30 funds may be a little different. Institutional investors, the early adopters of these hybrid strategies, seek alpha too. But they do so with a watchful eye to volatility (known to them as “tracking error” vs. a benchmark index). The key ratio for them is the “information ratio” (alpha/tracking error).
Comments »New Study: No hedge fund bubble…but a potentially serious capacity constraint30 March 2008
This is kind of ironic given that the industry seems to obsess over the “non-normality” of hedge fund returns. While fund and sub-strategy returns may be non-normal, there often seems to be an implicit assumption that alphas follow a bell curve. Thus, when hedge funds underperform, we assume that all hedge funds underperform - that the bell curve simply shifted to the left. But Zhaodong Zhong of Penn State University wondered if the averages hide a more complex explanation. His new study examines the performance of individual hedge funds to determine if average hedge fund alpha has fallen a) due to more unskilled managers (the “hedge fund bubble” hypothesis) or due to less superstars (the “capacity constraint” hypothesis). (Hat tip to blogger Paul Kedrosky for bringing this paper to our attention).
Comments »130/30: Nature or Nurture?24 March 2008To uncover underlying genetic predisposition for certain kinds of physical or mental health issues, scientists often study identical twins that have lived apart for some time. The assumption is that any similarities between the twins must therefore be a result of genetics, not environment - of “nature”, not “nurture”. Gordon Johnson of Lee Munder Capital in Boston has been performing a similar of experiment on 130/30 funds for some time now. He has been comparing the results from long-only and 130/30 funds managed by the same investment manager. By comparing funds with the same underlying genetic code (the managers’ unique investment views), he aims to determine whether the use of a ”short-extension” per se leads to a fundamentally different outcome. Johnson’s previous research indicated that 130/30 funds have indeed outperformed their long-only twins (see related posting). He has recently updated his findings to include the second half of 2007 - a volatile period for both the market and for 130/30 funds. We were curious to see these results because Johnson’s previous findings were based on years when the market appreciated. It turns out that the addition of the rest of 2007’s data reinforces his earlier finding that 130/30 funds have out- performed long-only funds managed by the same managers. As you can see from Johnson’s new chart above, over the past 42 months 130/30 funds have significantly outperformed their traditional siblings (note: he finds only 8 sets of twins in the eVestment Alliance database.) So it appears that when it comes to 130/30 funds, “nurture” continues to count for a lot.
Comments »Oh, to be a fly-on-the-wall at the recent HF replication conference.11 March 2008
9:00 AM Monday, March 10: “Got in yesterday despite the bad weather back home and a 300 mph jet stream (which also cramped up my wings a little - had to get a wing massage - but don’t worry, I won’t expense that). Nice Sunday afternoon in London though. Saw a Goose and a Black Swan cavorting yesterday in the park across from Buckingham Palace. Bad omen? Daffodils are blooming here, but storm coming in to London today. Miserable this morning. Hopefully send something more interesting about replication shortly.” 10:23 AM: “Peter Norman from AP7 discussed their separation of alpha and beta (see related posting). They get beta for free given its low-cost. Then they pursue alpha through risk budgeting to managers and not through capital allocations. Long positions are funded by short positions. AP7 covers any temporary losses and allows managers to use their credit. Risk allocation is done using a tracking error methodology carried over from their old long-only active management approach. Going forward, contemplating moving to a VaR approach.”
Comments »Shadwick to Quants: “Financial models should come with health warnings!”9 March 2008Regular readers may remember the name William Shadwick (see related posting). Widely known as the developer of the Omega Function and Omega Metrics®, Shadwick won the 2007 Journalism Award of the Investment Management Consultants Association ,jointly with Ana Cascon, for a paper in which they lifted the veil on some of their powerful new statistics for finance. A prominent mathematician, he was responsible for establishing the Fields Institute for Research in Mathematical Sciences before entering the finance industry in 1998. He is the founder of Omega Analysis, a quantitative research firm in London. Shadwick, who believes in using sophisticated tools and avoiding unnecessary complexity, issues a general warning about the “hidden assumptions” in quantitative models below. He has also been watching the ongoing debate between Harry Kat and Lars Jaeger and tells AllAboutAlpha, “I’m afraid it doesn’t offer much comfort to either the Jaeger or the Kat school…I think that over-modeling has had some severely negative consequences and it’s about time people started to pay more attention to the gap between theory and reality.” That’s all very well in practice, but it will never work in theory!
The title of this piece comes from a joke about a “highly qualified” financial engineer’s reaction to a well-proven trading strategy. It illustrates the tension between theory and practice that we have all seen as quantitative methods become ever more common at trading desks and in investment management. In general, the rise of quantitative tools in finance has been highly beneficial but the widespread use of models has been a decidedly mixed blessing. In science, the constant development of theories expressed as mathematical models to be tested, rejected, confirmed or refined through observation and experiment is the main source of progress in our understanding of the physical world. This process is also crucial for engineering and technology where it is the key to predicting future events and controlling them to our advantage.
Comments »Kat to Jaeger: “Let’s skip the nitpicking…how useful is modern finance theory, really?”5 March 2008One 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. Today, Kat responds to Jaeger’s rebuttal… Special to AllAboutAlpha.com by: Professor Harry M. Kat, Cass Business School, London
First, if you want to replicate a diversified hedge fund index, you don’t need alternative betas since such an index is almost fully driven by traditional risk factors. Second, the (traditional) factor exposures of diversified hedge fund indices do not seem to change quickly enough over time to completely invalidate the factor model approach. The performance (backtested or live) of the various factor model based replication products supports this. I showed the evolution of the Goldman Sachs ART index because the Bloomberg data go back until 1996, but I could well have picked another comparable product.
Comments »Alternative Viewpoints: “Liquidity Insurance”3 March 2008In December, guest contributor Ranjan Bhaduri, CAIA examined the cost of liquidity by using a simple exercise that he called the “balls in the hat game”. Bhaduri argued that illiquidity - a source of excess return - is often confused with “true alpha”. Today Konstantin Danilov, CAIA, of Bank of America proposes a new type of security that could be used to hedge against the possibility of an illiquidity crisis. Danilov conducts buy-side manager research at BofA. Prior to this, he was a trader at Cantella & Co. He is also a member of the Program Subcommittee for Alternative Investments and Hedge Funds of the Boston Security Analysts Society. His guest contribution below is the latest in a monthly series featuring members of the Chartered Alternative Investment Analyst (CAIA) Association. “Liquidity Insurance”
“Our current system of levered finance and its related structures may be critically flawed. Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.”
Liquidity is a topic that is brought up often in the wake of a financial crisis. The crash of 1987, LTCM, Amaranth, and the current sub-prime crisis are all examples of the devastating impact of illiquidity. Unfortunately, it is a factor that eludes the most risk management tools and risk/return models in modern financial theory. For example, Value-at-Risk (VAR) and “portfolio insurance” largely ignored illiquidity (or “assumed” it away) and we were left with the consequences.
Comments »Academic study: Morningstar ratings have “unintended consequence” of being “manipulation proof”2 March 2008
This likely comes as no surprise to Morningstar itself, which said in a recent press release:
While previous versions of its mutual fund rating system had “characteristics similar to those of an expected utility function” (see this paper by Sharpe in 1998), Morningstar revamped it in 2002 to include the asymmetrical utility of gains and losses experienced by investors (download PDF of the methodology).
Comments »Why the common expression “all correlations go to one” may be overstated28 February 2008
Since 1987, the term “correlations go to one in times of stress” has become axiomatic in financial markets. But does research actually back up his common assumption? In a January research note to clients (“Stress Risks within Asset and Surplus Frameworks” – available here at AllAboutAlpha.com with free registration), Morgan Stanley’s Marty Leibowitz and Anthony Bova take a good hard look at this phenomenon. According to their report:
Comments »CIO of the North Dakota State Investment Board on why he chose 130/3027 February 2008We talk a lot about the theory behind 1X0/X0 strategies. But given the nascence of this sub-sector, it has been difficult to come up with any real-life examples about which to write. Today, however, we welcome guest contributor and 130/30 investor, Steve Cochrane, the Chief Investment Officer of the North Dakota State Investment Board (NDSIB). With over 26 years of institutional investment experience Steve is responsible for the administration of the agency as well as overseeing a $5.4 billion diversified investment portfolio. The NDSIB was selected as a nominee for Money Management Letter’s 2007 Savviest Public Plan of the Year and is a speaker at Terrapinn’s upcoming 130/30 conference in Santa Monica. 130/30: How it works for North Dakota State Retirement Scheme
After twenty years in the institutional investment management business, I came to a monumental realization that what I had learned in business school is true: large cap securities that are actively traded in major financial markets are most likely efficiently priced. It has now been eight years since that awakening. The efficient markets hypothesis (EMH) was originally developed in the late 1960’s. It states that market prices should reflect all information known about a security. After forty-five years of research and testing, most agree that this hypothesis is increasingly correct as capitalization and liquidity increase. When it comes to the Large Cap Domestic Equity asset class in the United States, theory converges with reality. I arrived in North Dakota to assume the CIO role in January of 1997. Awaiting me was a US$2 billion pension fund with an array of active managers who were benchmarked against the S&P500 index of large cap stocks, as well as S&P500 style benchmarks. While some were growth oriented and others pursued value and yield investing, they all had one thing in common: underperformance relative to benchmark.
Comments »Kat: HF replication using alternative betas “very useful” but “sounds better on paper than in practice”20 February 2008Not one to shy away from a debate, Professor Harry Kat responds to last week’s column by Dr. Lars Jaeger on “traditional” and “alternative” betas in hedge fund replication. While Kat agrees with several of Jaeger’s arguments, he wonders if the mechanical-trading approach to delivering alternative beta isn’t just “too complex”. Some Comments on Lars Jaeger’s “Hedge Fund Replication and Alternative Beta: Two different ways of looking at replicating hedge funds”
In a note last week on AllAboutAlpha.com, Lars Jaeger discussed the two most common approaches to hedge fund replication: factor models and mechanical trading rules designed to capture “alternative betas”. Although I agree with several of the points that he makes, his comments are only part of the hedge fund replication story. In this brief note, I will attempt to fill in the picture. Most of my comments can also be found in some of my earlier writings on the subject. But it doesn’t hurt to repeat them, however, as we need to be clear on the issue. What is very important when trying to make sense of hedge fund replication products, is to keep an eye on what they actually aim to replicate. Almost without exception they aim to replicate, either explicitly or implicitly, a diversified hedge fund index. So hedge fund replication isn’t really about replicating hedge funds. It is about replicating hedge fund indices. Does that matter? Isn’t a hedge fund index just a portfolio of hedge funds? Yes, it is. But therein lays the problem. When combining hedge funds into a portfolio, many typical hedge fund features diversify away. As a result, diversified hedge fund indices have only a few hedge fund-like properties left and are mainly driven by equity and credit risk. This is easily confirmed by calculating their correlation with the S&P 500 for example. The important conclusion from this is that we do not need alternative betas to replicate a diversified hedge fund index. As Jaeger also suggests, it is primarily driven by traditional betas. With precious little alternative beta actually present in a diversified hedge fund index, the main problem when replicating it is traditional beta.
Comments »AAA Exclusive: Survey contains some surprises about how hedge fund managers now view “hedge fund replication”18 February 2008The results are in from our global online survey on “hedge fund replication” and you may find some of the results a little surprising. The sample of 180 hedge fund managers, investors, consultants and service providers reveals, for example, that hedge fund managers now see so-called hedge fund clones as a complement to their offerings – not a replacement. The survey was conducted jointly by AllAboutAlpha.com and conference producer Terrapinn over the period of January 29-February 6, 2008. What follows is a more in-depth look at the findings. Respondents to this survey represented a cross section of the hedge fund industry from single manager hedge funds to end investors – allowing for some interesting comparisons across segments.
Skeptics of hedge funds often argue that they produce little to no real alpha (see one such example in a recent posting). So to get an idea of the ideological views of the end investors and consultants we first asked them if they attributed hedge fund returns to “manager skill” or to simple risk premia…
Comments »AAA Exclusive: An interview with Prof. Harry Kat about his newest project, “super-diversification”11 February 2008
Well today German-based Aquila Capital, a 1.5 billion Euro manager of alternative investments, did just this. They announced the launch of a market neutral fund that uses Kat’s technique as a risk management overlay. According to the firm’s press release, its Statistical Value Market Neutral (SVMN) fund uses ”a combination of multi-asset investing and a behaviorally driven tactical asset allocation overlay” to actually generate alpha. Then it uses Kat & Palaro’s “FundCreator” software ”to ensure a stable and predictable risk profile over time”. Specifically, this means the fund is designed to have a volatility of 7%, a skew and kurtosis of zero and a correlation to the S&P 500 of zero. In addition, the fund aims to deliver a maximum monthly drawdown of 4%. The zero correlation to the S&P 500 provides what Aquila calls “super-diversification”.
Comments »Paper revisits what it means for a manager to be truly “active”5 February 2008
Unfortunately, things may not be that simple. A manager can pursue a passive strategy using a concentrated, yet representative sample of index names. Thus, security weightings would differ from index weightings, but the fund would perform very much like the market. Similarly, a fund can have security weightings that are similar to those of the index when the market is rising and different when the market is falling. Catch the fund at the wrong time and it would look passive. Mustafa Sagun and Scott Leiberton of Principal Global Investors make the case for adding holdings-based analysis to traditional measures of “activeness” in this December 2007 paper (”Alpha Dynamics: Evaluating the Activeness of Equity Portfolios“). Say the duo:
Comments »More on fixed income portable alpha5 February 2008In a December 2007 discussion paper, Franklin Templeton’s Australian fixed income group said it is seeing, “especially strong interest in the application of portable alpha to fixed income investing.” (Prudential’s fixed income group and Morgan Stanley’s Portable Alpha team would likely agree.) The paper is solidly alpha-centric:
While making the generic case for alpha/beta separation and portable alpha, it also suggests that the firm’s “Global Absolute Return” is an ideal source for the alpha component of the strategy. Says the paper:
Comments »AAA Exclusive: An Interview with Managers of the World’s Newest Hedge Fund Replication Product17 January 2008
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Frank Costanza: Are you telling me there’s not one condo available in all of Del Boca Vista?
As we reported in our weekly newsreel on Monday, Goldman Sachs just launched 
Special to AllAboutAlpha.com by: Srikanth Iyer, SVP, 
If you’re in the hedge fund industry, you know the name Pertrac. These are the guys who make the ubiquitous software platform that many hedge funds use to analyse and report performance to their investors. Last March, the firm compared the performance of large ($500 million+), medium ($100 million-$500 million) and small (under $100 million) hedge funds to see if size determined success in Hedgistan. They also compared the performance of young (under 2 years old), middle aged (2-4 years old) and seasoned (4 years old +) hedge funds.
It’s shaping up to be a banner week for alpha-centric investing in Europe. No sooner had the ink dried on one landmark alpha-centric mandate (see 
Apparently, 130/30 isn’t going away anytime soon. 
Whether one is referring to a 1X0/X0 fund or to some other long/short variant like a market neutral fund, there is often an implicit assumption that the “net exposure” provides all the insight required into the return potential of the fund. For example, many commonly assume that 130/30 funds are “beta neutral” and therefore that the “30/30″ portion will generate pure alpha. But what if that short-extension was just offsetting? To use an extreme example, if it was 30% long the S&P and 30% short the S&P, then there would be no alpha.
Special to AllAboutAlpha.com by: Kathryn Wilkens, Ph.D., CAIA, Director of Curriculum, the 
Since The President’s Working Group (PWG) released it’s “Best Practices for Hedge Funds” Report (
The term “portable alpha” is still a relatively new addition to the popular lexicon. As we’ve written on these pages, the term itself seems to morph on a regular basis to encapsulate the literal “porting” of alpha between asset classes to the combination of hedge funds and swaps. Issues like active management fees, regulation, risk measurement, and market efficiency seem to weave their way in and out of the various definitions of portable alpha. 
Hedge fund managers often contend that long-only managers lack the skills required to short-sell. They will point to things like the fact that short positions will actually grow as they move against you (unlike long positions which shrink as they move against you). They will also point to the fact that shorts tend to be driven more by catalysts than longs. But one of the most legitimate concerns raised by hedge fund managers is the simple fact that good short ideas are often in short supply. 
Several studies over the past few years have suggested that the much heralded “hedge fund alpha” is declining. These studies have examined average hedge fund performance (overall, or funds within a specific strategy). As a result, they have been unable to differentiate between two possible causes of the decline: an increase in the number of unskilled managers who generate negative alpha and a decrease in the number of hot-shots who produce large alphas (essentially, the skew of the hedge fund return distribution). 
Earlier today, a conference wrapped up in London featuring some of the big names in the hedge fund replication industry (Bill Fung & David Hsieh - see 
Special to AllAboutAlpha.com by: Dr. William Shadwick, Omega Analysis
Before I respond to Lars Jaeger’s comments in more detail, it is probably good to backtrack a bit. In my note of February 20, 2008, I made the following 3 points:
Special to AllAboutAlpha.com by: Konstantin Danilov, CAIA, Bank of America
You may recall that Morningstar launched its “Star Rating” for hedge funds 
In his book “A Demon of Our Own Design” Richard Bookstaber describes how the breakdown of basic market physics during Black Monday meant that “all stocks moved together” (
Special to AllAboutAlpha.com by: Steve Cochrane, Chief Investment Officer, North Dakota State Investment Board
Special to AllAboutAlpha.com by: Professor Harry Kat, Cass Business School, London
On October 21, we commented that Professor Harry Kat, developer of a “hedge fund replication” technique commonly called “distributional replication”, seemed to downplay his tool’s usage in replicating hedge fund returns and emphasized how it can instead be used as a risk management technique. 
There are (at least) two distinct ways of measuring the extent to which a manager attempts to create value. One is returns-based (alpha, tracking error, information ratio etc.) and one is holdings-based (the delta between holding weights and index weights). Holdings-based measures can provide a discrete snap-shot of a manager’s “activeness” which seems objective and undeniable. After all, if a manager holds positions in wildly different proportions that those in the index, how can his fund be anything other than highly active? 
There’s something in the water in Montreal, Canada. Montreal-based