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):

Walter Gehin

, Research Associate with the Edhec Risk and Asset ManagementResearch Centre.

Mathieu Vaissie

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

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