IN BRIEF

Alternative beta can diversify return sources in the same manner as traditional hedge funds, with greater liquidity and transparency—and at lower cost. “Alt beta” extends beta, the central idea behind index investing. Just as beta seeks systematic exposure to market risk alone—vs. exposure to any particular group of stocks—to generate an investment return, alternative beta seeks to gain systematic exposure to any compensated risk factor.

  • Research into alt beta has given investors ever more means to access and capture the structural drivers of hedge fund returns.

  • Alt beta strategies capture the premia available in hedge funds by employing hedge fund investment techniques. They invest in individual securities and make use of leverage, shorting and derivatives.

  • Alt beta provides a liquid, transparent and investible means of understanding hedge fund exposures. It markedly improves upon the uninvestible hedge fund composites commonly used as benchmarks today.

  • Transparent benchmarks raise the bar on active hedge fund management. At the same time, however, they can help pinpoint the causes of hedge fund performance, whether idiosyncratic or systemic.
 

Asset class returns are realized as traditional risk premia, or beta. Alternative beta, like beta itself, compensates for assuming risk. It differs from long-only beta in being constructed from relative returns, holding long positions in compensated risk factors while shorting uncompensated risks.

EXHIBIT 1: A SCHEMATIC TAXONOMY OF INVESTMENT RISK FACTORS
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Source: J.P. Morgan Asset Management. For illustrative purposes only.

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