A Beta Way To Boost HF Returns

Date: Friday, September 21, 2007
Author: Hedge Fund Daily

The secret ingredient to boosting performance of a hedge fund portfolio is some alternative beta, according to Stonebrook Capital Management. In fact, a first-of-its-kind study conducted for the New York-based firm that specializes in AB, says 30% is about the right mix. Based on 14 years of backtesting, the research found that the optimized portfolio containing AB generated annualized returns of 11.2% with a 3.53% standard deviation. In contrast, Hedge Fund Research’s HFRI Fund of Fund Index clocked in at 9.13% per year with a standard deviation of 5.56%. Says Jerome Abernathy, Stonebrook’s chief investment officer, who co-authored the study with Ahmad Ajakh, the firm’s director of research. “The study shows that alternative beta represents an important tool in the construction of hedge fund portfolios,” adding that AB “materially improves the liquidity characteristics of the portfolio, enables investors to concentrate on identifying and investing in high alpha managers and reduces headline risk.” Stonebrook says it has recently launched an AB product in a fund format, said to be the first of its kind in the U.S. “Alternative beta is quickly gaining acceptance as a liquid-efficient means to achieve the risk and return characteristic over the overall hedge fund industry,” notes Ajakh.