Credit Suisse forms Strategic Alternative Beta Research Partnership with Professors Fung, Hsieh and Naik

March 10, 2006

From BusinessWire:
Credit Suisse announced today the formation of a research partnership between its Beta Strategies group and Professors William Fung, David Hsieh and Narayan Naik, academic leaders in the areas of hedge fund and alternative beta research. The Beta Strategies group is Credit Suisse’s fiduciary quantitative index platform and is part of Funds and Alternative Solutions within Asset Management.

Professors Fung, Hsieh and Naik are widely-recognized as pioneers in researching the fields of alternative beta and hedge fund replication, having explored these topics from an academic perspective since 1994. Professor Fung serves on the boards of financial services companies and holds the position of Visiting Research Professor of Finance at the BNP Paribas Hedge Fund Centre, London Business School. Professor Hsieh is Bank of America Professor of Finance at the Fuqua School of Business, Duke University. Professor Naik is Professor of Finance and Director of the BNP Paribas Hedge Fund Centre at the London Business School.

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Seeking Absolute Alpha Because Beta Might Not Be There

March 10, 2006

From Seeking Alpha:
Warren Buffett, the world's richest person, seems to prefer security selection to asset allocation. He searches for alpha because he doesn't expect beta to deliver enough. Ye olde split of simple 60/40 stock and bond beta driven asset allocation is just not going to cut it and is needlessly risky anyway. Fortunately for investors there is a solution - adding to the portfolio the absolute returns generated from the security selection, risk management and market timing abilities of the world's best and most "expensive" fund managers. Diversify away that systemic risk and stagflation damage with new investment strategies.

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John Authers: The search for alpha

March 5, 2006

From Financial Times:
Darwinian laws affect in the investment jungle. If natural selection applies, soon there will be two kinds of investor: alpha hunters and beta blockers.

Rather than from biology, the trend within the investment management industry is derived from the logic of modern portfolio theory. This is the source of the Greek letters.

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What is Exotic Beta?

March 1, 2006

From Financial Planning:
While the term may conjure images of glamour and sophistication, exotic beta is essentially a practical, no-nonsense concept that can benefit the portfolios of everyday investors, not just the portfolios of the ultra-wealthy. Financial planners can use exotic beta to help optimize an investor's tactical asset allocation strategy.

The Concept

Exotic beta is a concept that was first introduced in the hedge fund world. It refers to a premium associated with exposure to a particular asset class. In other words, exotic beta measures the return derived from exposure to some systematic risk factors (such as credit risk, liquidity risk and volatility risk) that are common to a particular asset class, but not directly correlated to traditional stock or bond markets. These risk premiums vary by investment category. For example, investments in an international bond category may provide a specific risk premium owing to a lack of liquidity, political instability or currency changes.

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Low beta stocks will never let you down

January 28, 2006

From The Economic Times:
When the going gets tough, the tough get going...

The old adage appears more than inspiring, given the current situation in the stock market. By any measure, times are really tough for equity investors. After the free fall last Tuesday, the benchmark indices lost within a week what it took them three months to gain. Most of the stocks saw their fabulous returns wane, perhaps much faster than the popularity of Britney Spears!

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Working Paper Synopsis: The Search for the Beta of Commodity Futures

January 26, 2006

From The Market Oracle:
In comparing modern finance with behavioral finance, Dr. George M. Frankfurter, Lloyd F. Collette Professor Emeritus Louisiana State University, and Dr. Elton G. McGoun, Professor of Finance Bucknell University, in their article “ Resistance is Futile: The Assimilation of Behavioral Finance, ” [1] make the following astute observation which can similarly be applied to our analysis of the various commodity asset pricing models we investigated: “What has happened is that we've used these assumptions for so long that we've forgotten that we've merely made assumptions, and we've come to believe that the world is necessarily this way.” Likewise, our working paper, “ Is Managed Futures an Asset Class? The Search for the Beta of Commodity Futures ,” suggests that the models we dissected have inherent shortcomings when analyzing the commodity futures markets. This article summarizes that study which is available at SSRN: http://ssrn.com/abstract=1029243 .

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The alpha and beta of a lone manager

January 8, 2006

From Financial Times:
Most money managers like to think they do things a little differently from the crowd, but few take this as seriously as Ray Dalio.

Mr Dalio, who founded his company, Bridgewater Associates, more than 30 years ago, is relentless in his pursuit of difference. He tracks his funds’ correlations to the market and quickly tacks away whenever they appear to converge.

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Understanding beta and how to use it

January 7, 2006

From The Bangkok Post:
Three weeks ago we discussed Net Asset Value and its use. This week we will move on to the another frequently used investment term, beta ratio. Some people may believe that such terms are for brokers and investment professionals, but in fact beta is easy to understand and very valuable to apply.

Q: What is beta ratio?

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Holy Betas!

February 27, 2006

From 24/7 Wall St.:
Having examined how the timing model holds up against the Harvard and Yale endowments, how would it compare to the other brightest minds(and highest paid)in the room? In an earlier post, I examined the structure and characteristics of hedge fund databases and indices. Although the study is dated, here is a link that reveals that only 3% of hedge funds are represented in the 5 major databases.

Below, I am going to examine how a simple buy and hold asset allocation(labeled AA) and our timing model compare to the hedge fund indices. With the understanding that the hedge fund indices returns will likely be overstated, I present the year-by-year results of the timing strategy vs. the HFRI and HFR FOF indices (HFR is the longest time series available). For an apples-to-apples comparison, we have omitted any management fees to invest in either the hedge fund indices (index provider fees) or the timing models (ETF, mutual fund fees). Both should be on the order of 20 to 100 basis points.

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The Hunt For Exotic Beta

February 26, 2006

From SeekingAlpha:
One of the underlying themes of the investment markets since the end of the Internet bubble has been the pursuit of alternative asset classes. Relying on the returns of one primary asset class, domestic equities, was shown to be a short-sighted one. One approach is that of “radical diversification” that looks to add new asset classes in search of a more efficient portfolio.

This pursuit of more exotic betas has been manifested in the rapid growth of the ETF marketplace. After fulfilling the style and sector needs of equities, the ETF providers have expanded into more exotic asset classes. A few years ago a commodity ETF was a pipe dream. Now they are quite commonplace. Today we have ETFs that follow even more exotic strategies like the so-called “carry trade” in currencies. However for some high-net worth investors and institutions these types of products are not exotic enough.

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Hedge Fund Replication

February 7, 2006

From Risk.net:
Plain old beta wouldn't normally be first choice as a selling point for a new product, especially when your target market includes alpha-hungry hedge fund investors. But judging by the handful of so-called portable beta launches over the past few months, a smattering of players see a burgeoning market for automated products that offer pretty humble returns compared with the best-performing managers - but at a cut price.

Merrill Lynch, Goldman Sachs and two Swiss asset management companies, AlphaSwiss and Partners Group, have been the first to take the leap. The individual products target slightly different markets and play with different underlyings, but the driving force is essentially the same. They all seek to offer investors access to non-manager-specific industry-wide returns in a transparent and price-efficient format - in other words, they offer cheap beta.

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New ETFs Use Same Tools as 'Portable Alpha'

February 5, 2006

From SeekingAlpha:
For individual investors, ETFs are the easiest way to satisfy the beta requirement in an “alpha-centric” portfolio. This article illustrates how those ETFs now contain ingredients that are more exotic than you may have thought. No longer are ETFs simply bundles of stocks. Now, 2X levered and -2X levered (i.e. 2X short) ETFs provide individual investors with essentially the same tools used by institutions for “portable alpha” and its related strategies.

Behind the scenes, these ETFs are the same bundles of derivatives used by institutions. For example, the ProShares UltraShort QQQ ETF (QID) uses futures and options to allow investors to hedge particularly aggressive long bets. Institutional investors do essentially the same thing. Their much heralded “Portable Alpha” involves using futures and options to isolate alpha - only without paying an intermediary (ProShares) to package it for them.

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Mellon funds new portable alpha product with $1 bln

July 25, 2006

From Reuters:
Mellon Capital Management Corp. (MEL.N: Quote, Profile, Research), a unit of Mellon Financial, on Tuesday said investors have put up $1 billion for its latest "portable alpha" program designed to give investors better returns using hedge fund techniques.

San Francisco-based Mellon Capital, which has $148 billion in assets under management, called the new program International Equity Alpha Plus, its third portable alpha program launched this year.

Portable alpha is an investing technique whereby market-tracking 'beta' investments - generally index-tracking stock and bond funds - are sold and replaced by relatively cheap derivatives including options and futures.

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Foreign Low-Beta Bets

July 13, 2006

From Forbes:
As noted here, Americans should consider having 15-30% of their portfolio in overseas investments. We suggest a 5% allocation to up and coming economies like Brazil or India. The rest should go to more established, if slower growing, locales.

Know, however, that developed markets outside the United States also come with volatility. Since the start of 2006, the Standard & Poor's 500 has closed with daily gains or losses of 1% or more 21 times, whereas the Morgan Stanley Capital International EAFE index, which tracks market progress of the richest European and Asian economies, has 32 days with the same kind of swings.

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Hedge fund managers don’t deserve fees - BGI

June 19, 2006

From Investment & Pensions Europe:
Hedge fund managers do not always deserve their high fees, according to a recent research report by Barclays Global Investors.

While hedge funds do have some structural advantages, traditional investment firms also attract talented managers and provide their own set of advantages to institutional clients, according to BGI’s ‘Five Myths About Fees: The truth behind analysing fees in the context of investment goals’.

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Hedge funds well-placed for commods "alpha"

May 25, 2006

From Reuters:
Commodity hedge funds may have a harder time finding investors as prices of raw materials yo-yo after months of gains, but they remain the best bet for extraordinary profits, an industry executive said this week.

"There's no other sector that's done better than commodity hedge funds in the last two years," John D'Agostino, chief operating officer at MotherRock, a New York energy hedge fund, told Reuters in an interview.

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AIP Alternative Strategies Funds Announces the Launch of Beta Hedged Strategies Fund (Ticker: BETAX)

May 16, 2006

From PR Newswire:
AIP Alternative Strategies Funds (AIP) today announced that the 2nd fund in their growing family of alternative mutual funds, the Beta Hedged Strategies Fund (Ticker: BETAX), has officially opened to all investors. AIP is also the advisor to the Alpha Hedged Strategies Fund (Ticker: ALPHX) the first open-end multi-strategy mutual fund to directly access specialized hedge fund managers, which entered the ever growing alternative space in September 2002. The success of the Alpha Hedged Strategies Fund, and the demand in the marketplace and from ALPHX clients, led AIP to design and launch the Beta Hedged Strategies Fund. The Alpha Hedged Strategies Fund recently passed the $200MM mark and received a 4-star Overall Morningstar Rating(TM) for the 3-year period ended 4/30/06.

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Hedge Funds up 8% YTD Through April

May 15, 2006

From Business Wire:
The Greenwich-Van Global Hedge Fund Index gained +2.23%, outperforming the S&P 500 and the Lehman Brothers Aggregate Bond Index in April, according to hedge fund index provider Greenwich-Van Advisors, LLC. "The hedge fund rally continues," notes Wade McKnight, Greenwich-Van Vice President. "The Futures Index was the top-performing in April, while the Emerging Markets Index leads on a year-to-date basis. The US equity market volatility and the continuing strong markets in Europe helped Long/Short Equity Indices."

More than 85% of the 757 Funds included have reported a positive return. Final Index results will be calculated and posted at www.vanhedge.com the end of May after additional funds have reported.

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The Absolute Mix

April 24, 2006

From 123Jump:
Quite unusual for the mutual fund marketplace, the Absolute Strategies fund doesn’t choose the investments, but seeks the perfect mix of asset classes, strategies, and managers. The goal is absolute return with low volatility and low correlation with the market so that investors would not have to take losses every time the market takes a downturn. As a fringe benefit, it brings institutional approach in money management to the retail investor.

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Death knell for traders

April 20, 2006

From Globe & Mail:
Traders, advisers and fund managers — the middle men that stand between investors and their money — are a becoming a dying breed as massive changes brought on by the need for speed and transparency sweep through the global financial markets industry over the next decade, according to a survey by the IBM Institute for Business Value.

And interestingly, it is the little guy — the individual investor — who stands to benefit from the major changes expected in the industry between now and 2015, the survey suggests.

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