Dr. Martellini's Table of Contents
     in chronological order

• Portable Alpha and Portable Beta Strategies in the Euro Zone
  by Noël Amenc, PhD, Philippe Malaise, Lionel Martellini, PhD, Daphne Sfeir, PhD
  October 30, 2003
   
• The Alpha and Omega of Hedge Fund Performance Measurement
  by Noel Amenc & Lionel Martellini
  February 27, 2003
   
• Optimal Mixing of Hedge Funds with Traditional Investment Vehicles
  by Noel Amenc & Lionel Martellini
  February 15, 2003
   
• The Brave New World of Hedge Fund Indices
  by Noël Amenc and Lionel Martellini
  October 19, 2002
   
• Portfolio Optimization and Hedge Fund Style Allocation Decisions
  by N. Amenc & L. Martellini
  March 2002
   
• Taking a Close Look at the European Fund of Hedge Funds Industry
  by Noel Amenc, Jean René Giraud, Lionel Martellini, & Mathieu Vaissie
  January 4, 2002
   

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.

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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.

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Optimal Mixing of Hedge Funds with Traditional Investment Vehicles
by Noel Amenc & Lionel Martellini
EDHEC Graduate School of Business
February 15, 2003

Abstract
In this paper, we discuss the state-of-the art techniques for optimal asset allocation to traditional and alternative investment vehicles, and we specifically account for the difficulties in estimating risk/return parameters from hedge fund return data. We first present various techniques allowing an investor to better assess the contrasted diversification properties of hedge funds. In particular, we introduce a multi-factor framework for the assessment of which funds should be included for which portfolio. We also present various competing models allowing investors to get a quantitative estimate of the optimal fraction of a given portfolio that should be allocated to hedge funds, in a context where only imperfect estimates of hedge fund expected returns are available. We not only discuss optimal strategic asset allocation decisions; we also explain how tactical asset decisions can also be made in a portfolio mixing traditional and alternative investment vehicles. Finally, we show how hedge fund can be used as portable alpha vehicles in a core/satellite portfolio approach.

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The Brave New World of Hedge Fund Indices
by Noël Amenc and Lionel Martellini
October 19, 2002

Abstract
The fact that hedge funds have started to gain widespread acceptance while remaining a somewhat mysterious asset class enhances the need for better measurement and benchmarking of their performance. One serious problem is that existing hedge fund indices provide a somewhat confusing picture of the investment universe. In this paper, we first present detailed evidence of strong heterogeneity in the information conveyed by competing indices. We also attempt to provide remedies to the problem and suggest various methodologies designed to help build a “pure style index”, or “index of the indices” for a given style. We first explore a statistical approach to the construction of pure style indices, using Kalman filter techniques for the estimation of an unobservable factor from competing index return observations. Because it is desirable that a pure index can be regarded as a portfolio of existing indices, and hence a portfolio of underlying funds, we also suggest a portfolio approach to the problem. In particular, we suggest to use principal component analysis to extract the “best possible one-dimensional summary” of a set of competing indices, and to use minimum variance analysis to extract the “least biased portfolio” from a set of competing indices. Finally, we also provide evidence of the ability of pure style indices to improve benchmarking of hedge fund returns. Our results can easily be extended to traditional investment styles such as growth/value, small cap/large
cap.

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Portfolio Optimization and Hedge Fund Style Allocation Decisions
by N. Amenc & L. Martellini
USC Marshall School of Business - Department of Finance and Business Economics
March 2002

Abstract
This paper attempts to evaluate the out-of-sample performance of an improved estimator of the covariance structure of hedge fund index returns, focusing on its use for optimal portfolio selection. Using data from CSFB-Tremont hedge fund indices, we find that ex-post volatility of minimum variance portfolios generated using implicit factor based estimation techniques is between 1.5 and 6 times lower than that of a value-weighted benchmark, such differences being both economically and statistically significant. This strongly indicates that optimal inclusion of hedge funds in an investor portfolio can potentially generate a dramatic decrease in the portfolio volatility on an out-of-sample basis. Differences in mean returns, on the other hand, are not statistically significant, suggesting that the improvement in terms of risk control does not necessarily come at the cost of lower expected returns.

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Taking a Close Look at the European Fund of Hedge Funds Industry
by Noel Amenc, Jean René Giraud, Lionel Martellini, & Mathieu Vaissie
EDHEC RISK AND ASSET MANAGEMENT RESEARCH CENTRE
January 4, 2002

Abstract
Over the last few years institutional investors’ traditional portfolios have failed to meet their objectives in terms of risk and performance. Investors have thus shown growing interest in new forms of diversification, especially in investment vehicles that offer better protection during extreme market conditions. This has naturally led them to consider hedge funds as part of their investment universe. The massive arrival of institutional investors in an “industry” that up until then had been reserved to some High Net Worth Individuals or Endowments/Foundations resulted in a dramatic capital inflow and entailed a profound diversification of investors’ risk profile.

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