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November 14, 2005 at 07:00 PM
NEW YORK (HedgeWorld.com)–A money manager who claims to make alpha returns is in effect claiming to have a special approach that’s very hard to duplicate. Otherwise, why isn’t everybody else getting those extra profits?
Truth is, much of what hedge funds do can be learned and imitated. Indeed, recently a mutual fund company, Rydex Investments, started offering retail products that promise to reproduce the performance of certain hedge fund strategies, and at lower cost to the investor.
A new report from Rydex explains the underlying analysis. These funds make no attempt to provide alpha, said Jeff Joseph, managing director at Rydex Capital Partners. But the beta return they target is not just what comes from straightforward exposure to markets.
It includes a skill-based component. People have been unpacking beta: It is no longer seen as one thing. There’s the kind of return one gets from a long-only mutual fund and then there’s the kind that requires non-traditional activities–short selling, derivatives trading, use of leverage.
Skill-based beta is a hybrid–it’s more complex than traditional beta but more easily copied than alpha. Then again, it is not widely replicable, as long-only managers typically don’t have the skills.
Rockville, Md.-based Rydex has been offering unconventional mutual funds, including short-only vehicles, for many years. So its managers have developed the short-selling and derivatives trading abilities necessary to extract hedge fund beta.
Hedge funds claim to get alpha returns but really make both alpha and beta, said Mr. Joseph. The power of market exposure, or beta, as the driver of performance shows up vividly at times, as in late 2004 when many hedge funds gained substantially from a steep rise in equities toward the end of the year. There could not have been much alpha in those returns.
