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:
-
-
-
-
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?"
-
-
-
-
-
-
|
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]
|