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Seeking Alpha - “You don’t want to be average; it’s not worth it, does nothing. In fact, it’s less that the market. The question is, ‘How do you get to be first quartile?’ If you can’t, it doesn’t matter what the optimizer says about asset allocation.” – Dr. Allan Bufferd, CIO of the MIT endowment in Foundation and Endowment Investing.
While Dr. Bufferd was talking about investing in private equity, the same applies to hedge funds as well. (We have two extensive chapters on the topic in my book.) I wanted to chat a bit about hedge funds, and then more specifically hedge fund clones. I have written a bunch of articles on hedge fund indexing and replication in the past, and there has been a lot of chatter recently about hedge fund clones.
Investment News – Seizing on an anticipated increase in demand for alternative investments, a Greenwich, Conn.-based firm has rolled out an investible hedge-fund-tracking index that offers liquidity and transparency.
TrueBeta LLC’s index is designed to replicate the performance of the broader hedge fund universe through portfolios made up of liquid market indexes.
Financial Standard – Long/short hedge fund managers increased their net exposure to equity markets, allowing them to post positive returns last month, according to a replication index.
The Credit Suisse Long/Short Equity Replication Index, which replicates the performance of major hedge fund strategies, was up almost 2 per cent (net) in July.
At the same time, the Credit Suisse Global Macro Replication Index crept into positive territory by 3 basis points.
HedgeCo.net (West Palm Beach) – Long/Short Equity hedge funds continued to increase overall net exposures in July, enabling managers to capitalize on market upswings early in the month, according to Jordan Drachman, Head of Research for Alternative Beta Strategies at Credit Suisse.
Dr. Drachman noted, ”As risk appetite returns to the market, many Long/Short Equity hedge fund managers have increased their overall net exposures, which enabled them to generate positive returns as equity markets bounced back early in July. Despite mid-month volatility, managers were able to preserve gains to finish up for the month. The Credit Suisse Long/Short Equity Replication Index was up 1.96% (net) for the month, while the Credit Suisse Global Macro Replication Index finished up 0.03% over the same period.”
AIR Indices seek to replicate the performance of major hedge fund strategies and enable investors to gain liquid, transparent insight into the Global Macro and Long/Short Equity sectors of the Credit Suisse/Tremont Hedge Fund Index. The AIR platform also offers inverse indices that seek to approximate short exposure to the aggregate returns of the universe of Long/Short Equity and Global Macro hedge fund managers.
Performances for the AIR Global Macro and Long/Short Equity Indices are calculated daily and shown net of a 1.15% per annum calculation fee.
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Morningstar – A new breed of clone funds seeks to capture "alternative beta." It wasn’t long ago that hedge funds were on the very cutting edge of finance. Their pitch was simple: they could deliver pure alpha , rather than the heavy doses of beta being dished up by long-only mutual funds. The rub was that you’d have to pay dearly for that elusive component, and to get it, managers would often have to operate in inefficient markets where liquidity and capacity were scarce. Now that some of the mystique has left the asset class, a new concept has made its way to the investing frontier: hedge fund replication.
Seeking Alpha – The second hedge fund replication ETF from IndexIQ began trading on Tuesday (6/09/09). According to the press release, the IQ Hedge Macro Tracker ETF (MCRO) seeks to deliver risk-adjusted return characteristics similar to macro and emerging-market style hedge funds.
IndexIQ maintains indexes representing seven separate hedge fund strategies. Their first ETF, the IQ Hedge Multi-Strategy Tracker ETF (QAI), was launched on March 25 and is a composite of all seven underlying strategies.
The new MCRO ETF is designed to track two of the underlying strategies: the IQ Hedge Global Macro Beta Index and the IQ Hedge Emerging Markets Beta Index. The allocation to each strategy will change over time using a rules-based methodology.
Seekingalpha.com – In just about every action movie and TV show these days there is at least one scene where the hero asks one of his or her techies to “sharpen” a satellite image. Suddenly, what looked like a fuzzy bunch of pixelated squares takes on the form of someone’s face, a car, or some kind of mobile rocket launcher. We’re not graphic imaging specialists. But to us, it looks kind of outlandish that someone could take a very small amount of information (a few pixels) and divine the underlying image in fantastic detail.
But in a way, that’s exactly what Daniel Li & Michael Markov (of quantitative investment software vendor Markov Processes) and Russ Wermers of the University of Maryland have done in a paper released last month called “Monitoring Daily Hedge Fund Performance When Only Monthly Data is Available.” Their trick is to leverage another kind of technology: hedge fund replication.
