An Alternative Approach to Alternative
Beta

Hedge fund replication based on factor models is encountering growing interest. In this paper, we investigate the implications of substituting standard rolling windows regressions, which appear ad-hoc, with more efficient methodologies like the Kalman filter.

Illiquidity Premia in Asset Returns: An
Empirical Analysis of Hedge Funds, Mutual Funds, and U.S. Equity Portfolios

• By Laurent Favre

We establish a link between illiquidity and positive autocorrelation in asset returns among a sample of hedge funds, mutual funds, and various equity portfolios. For hedge funds, this link can be confirmed by comparing the return autocorrelations of funds with shorter vs. longer redemption-notice periods.

Sharpe Ratio Contribution and
Attribution Analysis

Relatively unnoticed, major advances have been made over the last eight years in the contribution and attribution analysis of risk and risk-adjusted performance. This is significant since classical performance attribution approaches, e.g. Brinson decompositions, ignore risk aspects altogether.

Accounting for Higher Moment Betas in
Asset – Liability Management: Finding the Optimal Equity Diversifier

In this paper we utilize higher moment betas to identify suitable equity diversifiers for the equity part of a traditional bond‐ and equity portfolio. With a Modified VaR optimization program put into an Asset – Liability Management framework we show that an allocation to hedge funds can reduce the down side risk in the portfolio and at the same time improve returns.

Demystifying Equity Risk-Based Strategies:
A Simple Alpha plus Beta Description

We considered five risk-based strategies: equally-weighted, equal-risk budget, equal-risk contribution, minimum variance and maximum diversification. All five can be well described by exposure to the market-cap index and to four simple factors: low-beta, small-cap, low-residual volatility and value. This is, in our view, a major contribution to the understanding of such strategies and provides a simple framework to compare them.

On the properties of equally-weighted
risk contributions portfolios

Minimum variance and equally-weighted portfolios have recently prompted great interest both from academic researchers and market practitioners, as their construction does not rely on expected average returns and is therefore assumed to be robust. In this paper, we consider a related approach, where the risk contribution from each portfolio components is made equal, which maximizes diversication of risk (at least on an ex-ante basis).

Black-Litterman based portfolio
optimization

We considered five risk-based strategies: equally-weighted, equal-risk budget, equal-risk contribution, minimum variance and maximum diversification. All five can be well described by exposure to the market-cap index and to four simple factors: low-beta, small-cap, low-residual volatility and value. This is, in our view, a major contribution to the understanding of such strategies and provides a simple framework to compare them.

Optimization of Conditional
Value-at-Risk

A new approach to optimizing or hedging a portfolio of nancial instruments to reduce risk is presented and tested on applications. It focuses on minimizing Conditional Value-at-Risk (CVaR) rather than minimizing Value-at-Risk (VaR), but portfolios with low CVaR necessarily have low VaR as well. CVaR, also called Mean Excess Loss, Mean Shortfall, or Tail VaR, is anyway considered to be a more consistent measure of risk than VaR.

Optimal allocation to hedge funds

Lionel Martellini and Mathieu Vaissié argue that it is only by taking into account the exact nature and composition of their existing portfolio that institutional investors can maximise the benefits they can expect from investing in hedge funds. To this end, they introduce suitably designed measures of the contribution of various hedge fund strategies to the risk in an existing stock/bond portfolio, and use them in the context of optimal selection of hedge fund strategies from an investor’s standpoint.

Extreme Dependence Structures and the
Cross-Section of Expected Stock Returns

We examine whether investors receive compensation for holding stocks with a strong sensitivity to extreme market downturns. Standard asset pricing models are unable to capture such extreme dependencies because they rely on the linear correlation between a stock and the market as their sole dependence measure. We use copulas to measure lower tail dependence between an individual stock's return and the market return as a proxy for a stock's crash sensitivity.

A Universal Performance Measure

We examine whether investors receive compensation for holding stocks with a strong sensitivity to extreme market downturns. Standard asset pricing models are unable to capture such extreme dependencies because they rely on the linear correlation between a stock and the market as their sole dependence measure. We use copulas to measure lower tail dependence between an individual stock's return and the market return as a proxy for a stock's crash sensitivity.

Alpha Decomposition Technique in AlternativeSoft

This document explains the methodology behind the Style Analysis technique used in AlternativeSoft. The Style Analysis procedure in AlternativeSoft can be applied to hedge funds, fund of hedge funds and mutual funds. In the first section, we explain how AlternativeSoft statistically constructs a benchmark for the fund. Most hedge funds claim that they belong to a certain strategy. However, we want to assess them against a benchmark that reflects their real exposure to that particular strategy. The alpha for the hedge fund is then calculated versus their real strategy exposures.