Alpha Mail - A monthly email update from AllAboutAlpha.com
Dear Alpha Mail Subscriber:

If September and October have proven anything, it's that hedge fund correlations are non-linear.  Typically modest correlations between hedge fund strategies and equity markets have a habit of rising significantly in times of distress.  History will surely document the triggers that led to this fall's abysmal returns, but early picks include: large scale redemptions (particularly from funds of funds), a kybosh on short selling (and a growing shortage of stocks to borrow), and yes, leverage (although as the Economist pointed out last week, "high leverage is not the unifying factor many believe it to be.")
 
Still, the underlying rationale for hedge funds and other alternatives investments remains sound.  Markets operate with varying levels of efficiency.  US large caps may be efficiently priced, but emerging market small caps, commercial real estate, or private equity may not.  Together, these "alternative" assets provide opportunities to generate alpha.  Hedge funds that aim to exploit the inefficiencies inherent in non-traditional markets, non-traditional instruments, or non-traditional ("alternative") betas also fall into this category.

On the other hand, hedge funds that have borrowed the moniker for marketing purposes will live or die along with their hidden betas.  But truly "orthogonal" alternative investments will flourish as long as capital markets exist.   
   
Last Month's Most Popular Posts 
 

Here are the most-read posts at AllAboutAlpha.com in October: 

  1. Hedge funds discovered not to be an "asset class" after all:  After years of being treated with the pomp and circumstance of a true asset class, the world is beginning to acknowledge that hedge funds are just a set of disparate strategies.
  2. Exactly how much of the hedge fund industry is about to get chopped anyway?:  Ever worry about losing a finger at one of those Japanese restaurants with the knife-wielding chefs?  Well that's how the hedge fund industry feels right about now.
  3. Hedge funds not bad at reading tea leaves finds new study:  What good is investment flexibility without foresight?  Bumpkis.  What good is investment flexibility with just a dash of prescience?  Two-and-twenty.     
  4. Exactly how bad was September for hedge funds?:  With markets down, it came as no shock to industry-watchers that hedge funds were also down.  But it turns out they were down even more than you might expect.  Can you say "non-linear?"
  5. "Have a contingency plan for 750-1000 bank failures over the next six months": Leading Academic: Duke's Campbell Harvey publishes what was probably the first academic paper of many on the TARP - released within days of the Plan.
  6. Hedge funds should rue the day that the term "absolute returns" was coined:  The hedge fund community is surely beginning to regret standing on an aircraft carrier declaring the end of relative returns.
  7. If hedge funds are "heading for the rocks", it's to rescue long-only castaways:  Journalists break out the thesaurus to one-up each other with colourful ways to describe negative hedge fund performance. 
  8. Hedge fund "families" growing larger every year:  Okay, they may not be breeding like rabbits, but hedge fund families are growing nonetheless.  
  9. Another kind of leverage they're watching closely in Basel:  The Bank for International Settlements has taken an interest in hedge fund leverage.  What they find will likely surprise many.
  10. Pension funds, endowments and hedge funds meet in Boston to talk it out: A previously scheduled conference of CIOs and hedge fund managers could not have been better timed.


In other news, those interested in hedge fund replication will be interested to see that the outspoken Professor Harry Kat is mixing it up again with members of the hedge fund community in the comment section of this recent post

It's probably an understatement to say that 130/30 has been bumped off the front pages these days.  But as a practical attempt to implement fundamental reform to the way we manage money, "short extension" strategies can't be ignored going forward.  For that reason, I hope to see some of you in New York later this month for Terrapinn's annual 130/30 gathering.  (We also hope to have the results of our second annual survey on this topic tabulated for the event.)
 
A final thought: Whether you call it tracking error, low-correlation, value-added, alpha or plain old active management, skill-based returns may be as important now as ever before.  As the authors of the recent AIMA publication "Road Map to Hedge Funds" wrote:
"Hedge funds are active investment managers. Active investment management is dependent on the willingness to embrace change and, more importantly, to capitalise on it. Adaptability is the key to longevity."
    
Happy Alpha Hunting,
 
Christopher Holt, Editor
AllAboutAlpha.com
[email protected]
 


Friday, Nov. 7, 2008
Katy bar the redemption gate!
Industry Partners
Integra Capital
 
The CAIA Association
 
Quick Links

Recent News Clippings

Subscribe now