Hedge Funds

A really good piece of paper about hedge fund, "The Tao of Alpha" by iluka.
Here's a summary.


1. Alpha and beta are simply the constant and slope terms of the linear regression of return against some benchmark.

2. It costs almost nothing to achieve market return (beta) - just buy index.
want better risk/return deal? (risk means market risk)- spend time and effort

3. Essence of alpha: extra return without extra risk
Total alpha = 0
the pursuit of alpha is a zero sum game.

4. in long term, beta > beta+expedted alpha-fees
then why still seek alpha?
confidence and hubris

5. Almost any beta exposure is an alpha seeking decision in a large context, e.g. S&P 500 in global equity market

6. Alpha - excess ruturn without excess market risk
but highly risky, unique risks not associated with tangible economic factors
so perfect supplement to any portfolio (diversification)

7. The case against alpha: market is efficient enough
The case for alpha: diversification, absolute return in bear market

8. Hedge fund industry: investors pay billions in fees for a total of nothing.

9. Theoretically, a hedge fund should deliver nothing but alpha, because beta is already available for free.
In reality, hedge funds are happy to sell beta to any investor who is willing to pay for it.

10. A strategy contains no beta because it lacks correlation with any measurable market factor, but it is difficult to show the distinction.
So hedge funds label themselves "absolute return", allowing beta to be sold as alpha.

11. How to find alpha? -> sustainable edge -> info or process info -> hard
fund managers have to turn to beta!

12. The performance of a hedge fund through volatile market conditions can tell an investor a lot about how much beta is really present.