The Credit Suisse Alternative Beta Strategies team today released Hedge Fund Investing: How to Optimize Your Portfolio . The report examines how hedge fund replication can be used to help mitigate risks that are inherent with hedge fund investing.

Dr. Jordan Drachman, Head of Research for Alternative Beta Strategies at Credit Suisse, summarized some key conclusions from the report (available here), “Over the past few years, exceptionally volatile markets have left hedge fund investors faced with a number of specific challenges, including a lack of transparency and liquidity, along with cash drag — the diminished performance that comes from holding too much cash. As a result, hedge fund replication, which aims to track the performance of hedge fund indices without investing directly in hedge funds, has grown in popularity as investors seek to manage their hedge fund allocations more efficiently.”

Peter Little, Head of Portfolio Management and Implementation for Alternative Beta Strategies at Credit Suisse, continued, “The daily liquidity profile of hedge fund replication strategies enables a range of applications, including liquidity management, tactical risk management and hedging. As market uncertainty has risen, we see clients leveraging these features in a number of ways. For example, we have seen a significant rise in the use of inverse exposure strategies, which seek to enable an investor to hedge against broad and strategy-specific risks without losing capacity with existing hedge fund managers. With continued uncertainty on the horizon, we expect interest in the space to intensify.”

The Credit Suisse Liquid Alternative Beta Index (“CSLAB”), which aims to reflect the performance of the overall hedge fund industry, finished down 3.41% in September. Overall, CSLAB is down 4.36% year-to-date versus a loss of 15.36% for the Dow Jones Global Index, a proxy for global equity markets.