Institutional investors need to be able to clearly define where returns are coming from in their hedge fund portfolios, whether it be alpha, hedge fund beta or market beta, and be conscious of the fees for each return source, principal and co-founder of AQR Capital Management, Cliff Asness, told delegates at the Fiduciary Investors Symposium in Beijing.
Asness (pictured) says breaking down the hedge fund portfolio into component sources of return is a valuable lesson from the financial crisis, and that portfolios should be built by investors based on this separation.
Asness, whose firm offers a range of strategies, says hedge fund beta is not a particularly wonderful skill, but is more engaging in a strategy that others don’t know about.
That can be achieved in a number of ways, he says, including taking risks others don’t want to; managing liquidity; and not reacting, or defying investor behaviour.
Asness defines hedge fund beta as the set of risks shared by hedge fund managers pursuing similar strategies.
“You don’t need a particular genius to do it,” he says.
Further, he says, hedge fund beta is everywhere, even within categories where you think [it] isn’t, such as global macro.
“They’re genius or maniacs, depending on how you look at it.
“But there is commonality.”
Hedge fund beta does not equal replication, he says.
The advantages of investing in hedge fund beta include lower cost and liquidity, he says, and provide a diversified, economically-intuitive alternative.
Asness’ was joined in a panel discussion by co-founder of K2 Advisors, David Saunders, head of alternatives at the British Airways Pension Fund, Bev Durston, and quantitative portfolio manager at CalPERS, Ho Ho.
Good alpha looks kind of like inside information but obtained through legal means like hard work and insight, Asness says.
He says the definition of a hedge fund is a strategy that trades relatively liquid assets, seeks to make positive average returns over time, and provides diversification to traditional stock and bond markets
More cynically, he says hedge funds can be defined as investment pools that are unconstrained, have high fees, are illiquid, non transparent, supposed to make money all the time, and are run by people in Geneva or by rich people in Connecticut.