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Dr. Lars Jaeger on Hedge Fund Replication and Alternative Beta

Jun 01 2010 4 Comments
Once thought impossible, hedge fund replication has become one of the buzzwords in the finance community, driven by the growing realization that most hedge fund returns come from risk premiums rather than manager alpha.

"Not since the emergence of index funds have so many people been active about being 'passive', says Dr. Lars Jaeger, Head Alternative Beta Strategies at Partners Group. Lars is one of the pioneers of hedge fund replication strategies and prolific researcher on "alternative (exotic) Beta".

However, the ...more

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I look forward to your feedback at knab@opalesque.com

Matthias Knab Posted On Jun 01 2010

There are many ways to analyze the statistics. While losing 11% in 2008 is better than broad hedge fund indices, one has to ask how valuable the indices are in the first place. In other words, seasoned hedge fund investors have known for a long time that one has to look hard for a good hedge fund because as the hedge industry boomed, plenty of people with insufficient talent entered, so that "average" results as expressed by indices already includes a lot of managers that are not worth the money. So doing better than the indices isn't really saying much. Numerous hedge funds made money in 2008. The really good managers make money even during blowouts. They don't start reverting to traditional thinking and claim that they did well because they lost less than some benchmark.

anonymous Posted On Jun 02 2010

To be fair, hedge funds posted disappointing returns in 2008, but the average hedge fund return of -18.65% (the HFRI Fund Weighted Composite Index return) was far better than the returns generated by most assets other than cash.

The S&P 500 total return was -37.00% in 2008, and that was one of the best performing equity indices in the world. Several equity markets lost more than half their value. Most foreign and domestic corporate debt indices also suffered in 2008, posting losses significantly worse than the average hedge fund. Mutual funds also performed much worse than hedge funds in 2008. According to Lipper, the average U.S. domestic equity mutual fund decreased 37.6% in 2008. The average international equity mutual fund declined 45.8%. The average sector mutual fund dropped 39.7%.

The average China mutual fund declined 52.7% and the average Latin America mutual fund plummeted 57.3%. Real estate, both residential and commercial, also suffered significant drops in 2008. In summary, hedge funds outperformed many similarly-risky investment options in 2008 and 11% down is a clear outperformance of hedge funds and fund of funds.

Matthias Knab Posted On Jun 02 2010

Lars says that their approach lost 11% in 2008 and that this results is "pretty good"? If alternative beta is to be considered an "alternative" strategy, in the most basic sense of the word, it should have done better than that. Lars is happy that he lost "only" 11% because his thinking is stuck in the traditional benchmark mentality, as in, we didn't lose as much as the equity markets, or as other (not-so-good) alternative managers, so we are happy. Nonsense. Looking at his ABP website, they discuss top-down and bottom-up approaches to hedge fund replication and conclude that bottom-up, as it is more dynamic and involves the manager "acting like" a hedge fund, is superior. Acting like a hedge fund, they say, includes short-selling and the use of derivatives. Well, sounds like they are just another hedge fund, but maybe a cheaper one and maybe not a very good one, since the better hedge funds made money in times of crisis like 2008. The replication game Lars plays is still suboptimal, it seems.

anonymous Posted On Jun 02 2010

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