Skip to main content

Selling beta for the price of alpha

The All About Alpha blog has posted a link to a recent EDHEC interview with "Handbook of Hedge Funds" author François-Serge Lhabitant, who talks a bit about hedge funds and their strategies.

Lhabitant also discusses replicable hedge fund strategies, and in the midst of some rather arcane discussion about possible replication of hedge fund performance, notes that some hedge funds may be "selling beta for the price of alpha".

Here's the quote in context:

In the average hedge fund, there are probably a lot of these static risk exposures and replication will work well. But in the “best” hedge funds - the few ones I am typically looking for as an investor - what I pay for is proprietary strategies with skilled traders, robust risk management and technology, and constant capital reallocation towards the best opportunities.

I am also buying the experience of a manager that has been going through crashes and knows what to do when liquidity dries out, his credit lines are pulled down and his level of margins revisited. This dynamic behaviour is very difficult to replicate and this is why I might agree to pay 2 and 20 and sometimes even much more.

So, my view is that if a fund is replicable ex-ante month after month by a simple “automated” strategy, then I am not interested in this fund – its manager is essentially selling beta at the price of alpha. Note that this is probably the case of the majority of hedge funds and hedge fund indices today, so why not replicate them…

He goes on to differentiate between these "automated" strategies and the replication approach suggested by Harry Kat via his Fund Creator vehicle, both the subjects of an earlier post.

Those EDHEC interviews seem like a cool resource for understanding more about the hedge fund world; I just feel like I need someone to explain them to me. Thanks to Abnormal Returns for pointing us to the link.

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li

Moneyball: How the Red Sox Win Championships

Welcome, readers . T o get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter .   The Boston Red Sox won their fourth World Series title of t he 21st century this we ek. Having won their first Se ries in 86 years back in 200 4, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it? Quick background: in late 2002, team own er and hedge fund manager, John W. Henry (with his partners ) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $ 695 million. Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship. This brings us to one of my fav orite scenes from the 2011 film , Moneyball , in which John W. Henry (played by Ar liss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pi