Replicator Beats Managers

An index that tracks reproducible hedge fund performance had significantly higher return than actual hedge funds in the period that started January 2008. Boris Arabadjiev, chief investment officer of the Credit Suisse fund of hedge funds group, found that this replicator outperformed underlying hedge fund strategies by as much as three to five percentage points.

What does it mean? Certain hedge fund techniques that can’t be replicated – securities selection, tactical trading – detracted from value this year, Mr. Arabadjiev said.

The replicator, the Credit Suisse Liquid Alternative Beta Index, measures a return that can be generated using securities and other liquid instruments. It beat the Dow Jones Credit Suisse Hedge Fund Index, which  shows the combined performance of a group of managers.

Mr. Arabadjiev attributes this to high and rising correlations between securities during the past two years—when correlations are high, some hedge fund styles don’t work well. With correlations now coming down to historical averages, hedge fund managers’ returns improved in the past couple of months.

Under different circumstances, the managers did better than the replicator—for instance in 2005-2006. The past two years were, of course, unusual. But Liquid Alternative Beta, as the name suggest, has the advantage of liquidity, a quality investors have come to value more after many managers froze redemptions in the crisis.


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