Edhec: 'Overlay Hedging' Improves Alpha

Nov 3 2008 | 9:28am ET

By Christopher Holt -- The truth is out, hedge funds have long equity exposure. Our back-of-the-envelope analysis of the HFRI Index last week showed that all strategies—particularly “Equity Hedge”—had a positive correlation with equity markets.

So what can an investor seeking truly uncorrelated returns do about this? After all, it’s quite possible that a hedge fund could produce alpha, but deliver it to investors with a side helping of over-priced beta. Short bias managers, for example, are often said to produce a positive alpha even though they lose their shorts year after year. It is cases like this that make the term “absolute returns” a misnomer (see related post).

A new paper by the Edhec Risk and Asset Management Research Centre illustrates the ways that a fund of hedge funds can mitigate itself from these not-so-hidden factor exposures. Continue Reading on AllAboutAlpha.

 


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