The Right Place for Alternative Betas in Hedge Fund Performance: an Answer to the Capacity Effect Fantasy
Two studies, by Watson Wyatt and UBS (both from March 2005), give a pessimistic view of the hedge fund industry's capacity to generate long-term returns, due to its increasing size.
Author(s):
, Research Associate with the Edhec Risk and Asset ManagementResearch Centre.
Research Centre.
Unfortunately, these studies focus almost exclusively on alpha. In the present paper, we show the importance of considering not only the exposure to the market (the traditional beta), but also the other exposures (the alternative betas) to cover all the sources of hedge fund returns. To do so, we examine the real extent to which the variability and level of hedge fund returns are affected by (static) betas, dynamic betas (i.e., factor timing), and pure alpha (i.e., security selection).
| Type: | EDHEC Publication |
|---|---|
| Date: | le 06/06/2005 |
| Research Cluster : | Finance |
See Also
About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the top 15 European business schools. Fully international and directly connected to the business world, EDHEC is a school for business, rather than a business school, where excellence in teaching and research focuses on innovation to stimulate entrepreneurship and creativity. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching philosophy, inspired by its award-winning research activities, focuses on “learning by doing”.
