Where does generating alpha come from

(Last Updated On: July 14, 2016)

Where does generating alpha come from

Some highlights from this interesting roundtable

Why monthly return numbers are useless for a proper fund analysis

In the current environment, the hedge fund space is more relevant for investors than ever before, but you need tools which are better than the tools you had in the past. The hedge fund space has a very serious problem related to the fact that a lot of the screening for managers and a lot of the “research” (i.e., understanding what managers do) is based on a single number that the managers report once a month: the return. And it’s virtually impossible, to find anything meaningful using this approach, says Prof. Luis Seco from Sigma Analysis. While the monthly return information is of course important, it’s a massive compression exercise from where it is hard to extract a meaning. Investors are getting just a summary of thousands of activity points cumulating to one number.

Hedge fund portfolios would be too complicated to understand from a data series of one number per month. Rather, “You have to go to the transactional data. We have been doing this for ten years now, on a lot of funds. When you look at every transaction that hedge fund is doing, you can develop analytical tools to understand where they make money and where they lose money, and why. I come from a world where we run all our clients’ money on a managed-account platform, so we have access to virtually all relevant information. Imagine you get to see everything the hedge fund does, what decisions were right, what decisions were wrong through the right analytical toolbox, you get access to what people call alpha, except it is not alpha anymore, because alpha and beta are statistical numbers, but there are no statistics involved here – they are direct analytics. Following this approach, suddenly you have a tremendous tool to do manager selection and portfolio construction.”


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