The aura of mystery that surrounds hedge funds has allowed them to present their returns solely as a consequence of manager skill, or alpha. Recently, poor aggregate performance has challenged this perception. Have hedge fund managers lost their touch? The truth may rather be that the drivers of their returns are misunderstood. Beta research lifts the lid on the hedge fund black box. What it reveals is that a large part of the returns of many hedge funds can be attributed to factors widely known in the investment world. These factors can earn premia for taking risks that other investors do not want to (or cannot) take.
So-called hedge fund (or alternative) beta represents a way to understand hedge fund returns. It also offers a low cost, transparent and liquid means of investing in hedge fund strategies. Hedge fund beta is, in many ways, no different from the market risk premium (or equity beta) that so shook up the world of mutual funds when passive investments became available. The figure below highlights some parallels in the development of equity beta and the newer hedge fund beta.
Opinions and statements of market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These views described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns.