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Alpha Related Scholarly Compositions
See also:
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Alpha Related Books,
or
Alpha Home Page.
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The Alpha Factor Asset Pricing
Model: A Parable
by Wayne E. Ferson, Sergei Sarkissian, & Timothy Simin
University of Washington
August 1998
Abstract
Recent empirical studies use the returns of attribute-sorted
portfolios of common stocks as if they represent risk factors in
an asset pricing model. If the attributes are chosen following
an empirically observed relation to the cross-section of stock
returns, such portfolios will appear to be useful risk factors,
even when the attributes are completely unrelated to risk. We
illustrate this result using a
parable and argue that the moral of the story is important in
practice...
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The Alpha in Fund of Hedge Funds
by Alexander M. Ineichen, CFA, CAIA
UBS Warburg
February, 2002
Abstract
All hedge funds are not created equal. A poorly chosen portfolio
of hedge funds can produce disappointing results. All fund of
funds managers are not created equal, either. A poor choice of
fund of funds managers can yield disappointing results. This
article is designed to outline the value proposition of a fund
of hedge funds operation. We conclude that fund of funds add
value primarily through manager selection.
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The Alpha and Omega of Hedge Fund
Performance Measurement
by Noel Amenc & Lionel Martellini
EDHEC Graduate School of Business & the Marshall School of
Business at the University of Southern California
February 27, 2003
Abstract
That hedge funds start gaining wide acceptance while
they still remain a somewhat mysterious asset class enhances the
need for a better measurement of their performance. This paper
is an attempt to provide a unified picture of hedge fund
managers' ability to generate abnormal returns. To alleviate the
concern over model risk, we consider an extensive set of models
for assessing the risk-adjusted performance of hedge fund
managers. We conclude that hedge funds appear to have
significantly positive alphas when normal returns are measured
by an explicit factor model, even when multiple factors serving
as proxies for credit or liquidity risks are accounted for.
However, hedge funds on average do not have significantly
positive alphas once the entire distribution is
considered or implicit factors are included. While we find
significantly positive alphas for a sub-set of hedge funds
across all possible models, our main contribution is perhaps to
show that (i) different models strongly disagree on the absolute
risk-adjusted performance of hedge funds as evidenced by a very
large dispersion of alphas across models and yet (ii) they
largely agree on hedge funds'relative performance in the sense
that they tend to rank order the funds in the same way.
Visit www.EDHEC-Risk.com for the full
paper...
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Building a Better Fund of Hedge
Funds: A Fractal and Alpha-Stable Distribution Approach
by Yan Olszewski
Maple Financial Group
December 2005
Abstract
Markowitz's (1952) portfolio theory has permeated financial
institutions over the past 50 years. Assuming that returns are
normally distributed, Markowitz suggests that portfolio
optimization should be performed in a mean-variance framework.
With the emergence of hedge funds and their non-normally
distributed returns, mean-variance portfolio optimization is no
longer adequate.
Here, hedge fund returns are modeled with the alpha-stable
distribution and a mean-CVaR portfolio optimization is
performed. Results indicate that by using the alpha-stable
distribution, a more efficient fund of hedge funds portfolio can
be created than would be by assuming a normal distribution. To
further increase efficiency, the Hurst exponent is considered as
a filtering tool and it is found that combining hedge fund
strategies within a range of Hurst exponents leads to the
creation of more efficient portfolios as characterized by higher
risk-adjusted ratios. These findings open the door for the
further study of econophysics tools in the analysis of hedge
fund returns.
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Market Timing, Selectivity and Alpha Generation
by Michael E. Drew, Madhu Veeraraghavan, & Vanessa Wilson
February, 2005
Abstract
In
this performance evaluation study, two questions are addressed.
First, do active fund managers possess macro and micro
forecasting skills that deliver superior risk-adjusted returns?
Second, what is the nature of market timing/stock selectivity
trade off in the generation of alpha? The answers from this
study are as follows: as an industry, managers delivered
inferior returns for superannuation investors for the period
1991 through 2000. The study provides little evidence that the
Australian funds management industry holds sufficient macro
and/or micro forecasting abilities to generate positive alpha.
While previous research has found that inferior market timing
decisions are compensated for by superior stock selection
skills, this study finds no substantive inverse relationship
between timing and selectivity.
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Portable Alpha - Philosophy, Process, &
Performance
by Edward Kung & Larry Pohlman
PanAgora Asset Management
2004
Abstract
Active investment managers provide two types of return: the
return generated from market exposure or “beta” and the return
that comes from selection skill or “alpha.” Active “beta”
returns typically come from market timing. That is, increasing
market exposure in up-markets and decreasing it in
down-markets...
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Portable Alpha and Portable Beta Strategies in
the Euro Zone
by Noël Amenc, PhD, Philippe Malaise, Lionel Martellini, PhD,
Daphne Sfeir, PhD
EDHEC Graduate School of Business
October 30, 2003
Abstract
While stock picking strategies are in principle meant to exploit
evidence of predictability in individual stock specific risk,
most equity managers, as a result of their bottom-up security
selection decisions, often end up making discretionary, and most
of the time unintended, bets on market, sector and style returns
as much as they make bets on individual stock returns. In this
paper, we show how portfolio managers in the Euro-zone can
benefit from using derivatives markets to actively manage their
asset allocation decisions in a systematic manner. Using a
robust econometric process based on a non-linear multi-factor
thick and recursive modeling approach, we report statistically
and economically significant evidence of predictability in Dow
Jones EURO STOXX 50 excess return. These econometric forecasts
can be turned into active portfolio decisions and implemented
via Eurex index futures to generate active asset allocation
portable
alpha benefits. We also show that adding active sector rotation
decisions to asset allocation decisions allows one to
significantly lower the portfolio volatility as a result of the
benefits of bet diversification: We finally explain how active
portfolio managers can benefit from using suitably designed
Eurex option strategies as portable beta vehicles. In
particular, option portfolios can be used to enhance the
performance of tactical asset allocation programs by
consistently adding value during the periods of low volatility
when timing strategies are known to perform rather poorly. The
benefits of active asset allocation decisions reported in this
paper originate from the combination of a robust econometric and
portfolio process on the one hand, and an efficient trading of
low cost investible products such as Eurex index futures and
options on the other hand. This strongly suggests that most
long-short managers could use a similar methodology to enhance
the performance of their portfolios without having to rely on
the alleged
superior performance of any specific predictive model.
Visit www.EDHEC-Risk.com for the full
paper...
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Results on the Standard Error of the Coefficient
Alpha Index of Reliability
by Adam Duhachek, Anne T. Coughlan, & Dawn Iacobucci
2005
Abstract
In this research, we investigate the behavior of Cronbach’s
coefficient alpha and its new standard error. We systematically
analyze the effects of sample size, scale length, strength of
item intercorrelations, and scale dimensionality. We demonstrate
the beneficial effects of sample size on alpha’s standard error
and of scale length and the strengths of item intercorrelations
(effects that are substitutes in their benefits) on both alpha
and its standard error. Our findings also speak to this adage:
Heterogeneity within the item covariance matrix
(e.g. through multidimensionality or poor items) negatively
impacts reliability by decreasing the precision of the
estimation. We also examined the question of “equilibrium ”scale
length, showing the conditions for which it is optimal to add no
items, or one, or multiple items to a scale. In terms of “best
practices,” we recommend that researchers report a confidence
interval or standard error along with the coefficient alpha point
estimate.
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Back to Scholarly Compositions
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| HEDGE FUND RISK AND OTHER
DISCLOSURES |
Hedge funds, including fund of funds (“Hedge
Funds”), are unregistered private investment partnerships, funds or
pools that may invest and trade in many different markets,
strategies and instruments (including securities, non-securities and
derivatives) and are NOT subject to the same regulatory requirements
as mutual funds, including mutual fund requirements to provide
certain periodic and standardized pricing and valuation information
to investors. There are substantial risks in investing in Hedge
Funds. Persons interested in investing in Hedge Funds should
carefully note the following:
- Hedge Funds represent speculative investments and involve a
high degree of risk. An investor could lose all or a substantial
portion of his/her investment. Investors must have the financial
ability, sophistication/experience and willingness to bear the
risks of an investment in a Hedge Fund.
- An investment in a Hedge Fund should be discretionary capital
set aside strictly for speculative purposes.
- An investment in a Hedge Fund is not suitable or desirable for
all investors. Only qualified eligible investors may invest in
Hedge Funds.
- Hedge Fund offering documents are not reviewed or approved by
federal or state regulators
- Hedge Funds may be leveraged (including highly leveraged) and
a Hedge Fund’s performance may be volatile
- An investment in a Hedge Fund may be illiquid and there may be
significant restrictions on transferring interests in a Hedge
Fund. There is no secondary market for an investor’s investment in
a Hedge Fund and none is expected to develop.
- A Hedge Fund may have little or no operating history or
performance and may use hypothetical or pro forma performance
which may not reflect actual trading done by the manager or
advisor and should be reviewed carefully. Investors should not
place undue reliance on hypothetical or pro forma performance.
- A Hedge Fund’s manager or advisor has total trading authority
over the Hedge Fund.
- A Hedge Fund may use a single advisor or employ a single
strategy, which could mean a lack of diversification and higher
risk.
- A Hedge Fund (for example, a fund of funds) and its managers
or advisors may rely on the trading expertise and experience of
third-party managers or advisors, the identity of which may not be
disclosed to investors
- A Hedge Fund may involve a complex tax structure, which should
be reviewed carefully.
- A Hedge Fund may involve structures or strategies that may
cause delays in important tax information being sent to investors.
- A Hedge Fund may provide no transparency regarding its
underlying investments (including sub-funds in a fund of funds
structure) to investors. If this is the case, there will be no way
for an investor to monitor the specific investments made by the
Hedge Fund or, in a fund of funds structure, to know whether the
sub-fund investments are consistent with the Hedge Fund’s
investment strategy or risk levels.
- A Hedge Fund may execute a substantial portion of trades on
foreign exchanges or over-the-counter markets, which could mean
higher risk.
- A Hedge Fund’s fees and expenses-which may be substantial
regardless of any positive return- will offset the Hedge Fund’s
trading profits. In a fund of funds or similar structure, fees are
generally charged at the fund as well as the sub-fund levels;
therefore fees charged investors will be higher that those charged
if the investor invested directly in the sub-fund(s).
- Hedge Funds are not required to provide periodic pricing or
valuation information to investors.
- Hedge Funds and their managers/advisors may be subject to
various conflicts of interest.
The above general
summary is not a complete list of the risks and other important
disclosures involved in investing in Hedge Funds and, with respect
to any particular Hedge Fund, is subject to the more complete and
specific disclosures contained in such Hedge Fund’s respective
offering documents. Before making any investment, an investor should
thoroughly review a Hedge Fund’s offering documents with the
investor’s financial, legal and tax advisor to determine whether an
investment in the Hedge Fund is suitable for the investor in light
of the investor’s investment objectives, financial circumstances and
tax situation.
All performance information is believed
to be net of applicable fees unless otherwise specifically noted. No
representation is made that any fund will or is likely to achieve
its objectives or that any investor will or is likely to achieve
results comparable to those shown or will make any profit at all or
will be able to avoid incurring substantial losses. Past performance
is not necessarily indicative, and is no guarantee, of future
results.
The information on the Site is intended for
informational, educational and research purposes only. Nothing on
this Site is intended to be, nor should it be construed or used as,
financial, legal, tax or investment advice, be an opinion of the
appropriateness or suitability of an investment, or intended to be
an offer, or the solicitation of any offer, to buy or sell any
security or an endorsement or inducement to invest with any fund or
fund manager. No such offer or solicitation may be made prior to the
delivery of appropriate offering documents to qualified investors.
Before making any investment, you should thoroughly review the
particular fund’s confidential offering documents with your
financial, legal and tax advisor and conduct such due diligence as
you (and they) deem appropriate. We do not provide investment advice
and no information or material on the Site is to be relied upon for
the purpose of making investment or other decisions. Accordingly, we
assume no responsibility or liability for a ny investment decisions
or advice, treatment, or services rendered by any investor or any
person or entity mentioned, featured on or linked to the Site.
The information on this Site is as of the date(s) indicated,
is not a complete description of any fund, and is subject to the
more complete disclosures and terms and conditions contained in a
particular fund's offering documents, which may be obtained directly
from the fund. Certain of the information, including investment
returns, valuations, fund targets and strategies, has been supplied
by the funds or their agents, and other third parties, and although
believed to be reliable, has not been independently verified and its
completeness and accuracy cannot be guaranteed. No warranty, express
or implied, representation or guarantee is made as to the accuracy,
validity, timeliness, completeness or suitability of this
information.
Any indices and other financial benchmarks
shown are provided for illustrative purposes only, are unmanaged,
reflect reinvestment of income and dividends and do not reflect the
impact of advisory fees. Investors cannot invest directly in an
index. Comparisons to indexes have limitations because indexes have
volatility and other material characteristics that may differ from a
particular hedge fund. For example, a hedge fund may typically hold
substantially fewer securities than are contained in an index.
Indices also may contain securities or types of securities that are
not comparable to those traded by a hedge fund. Therefore, a hedge
fund’s performance may differ substantially from the performance of
an index. Because of these differences, indexes should not be relied
upon as an accurate measure of comparison.
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