Former Moore Research Head Makes Case For Alternative Beta

Date: Wednesday, April 2, 2008
Author: FINalternatives.com

One hedge fund honcho thinks investors need not invest in hedge funds to get hedge-like returns. Jerome Abernathy, the former research director at Moore Capital Management, is currently marketing the Stonebrook Alternative Beta Fund, which he says can achieve alpha without the risks and fees associated with hedge funds.

Abernathy said the $54 million fund, which attempts to deliver hedge fund-like returns by periodically rebalancing a portfolio of simple instruments like the Standard & Poor’s 500 and Russell 2000 indicies, and treasury bonds, tends to out-perform during periods of liquidity crises and under-performs during periods of very strong returns for hedge funds in general.

So how did the fund, which launched in May, do during last year’s subprime crisis and January’s global equity crisis? The unlevered version finished its first six months up 9.6%, though it is down 2.85% through February, identical to the HFRI FoF Composite Index’s decline.

While Abernathy concedes that hedge funds and funds of hedge funds do generate alpha on a gross basis, he countered that the alpha is more than offset by the high fees so, on a net basis, they don't deliver any alpha to investors.

“The fund offers weekly liquidity (notice on Monday, money wired out on Friday), no headline risk, and superior tax treatment,” claimed Abernathy.

The fund charges a 1.5% management fee and has a $500,000 minimum investment requirement.

“We think alternative beta will change the way investors view hedge funds and measure their performance,” said Abernathy. “In the same way beta was separated from alpha with the advent of equity index funds, we will see the same separation in hedge funds.  It is a natural evolution.”

Next up for Abernathy? A mutual fund platform to be launched sometime in June.