Is it REALLY Alpha?
The daily reports of hedge fund losses seemingly triggered by, or secondary to, problems in the sub-prime mortgage markets raise an important question. How much of hedge fund gains are really the result of uncovering exploitable arbitrage opportunities wherever they may be found versus some form of alternative beta. In other words, is a significant portion of these returns in recent years the result of taking exposure to specialized systemic risk factors?
One argument supporting the alternative beta view is the comparative success in efforts to replicate the returns of specific hedge fund strategies using fixed or mechanically rebalanced portfolios of tradable instruments. See http://www3.sungard.com/SunGardFinancial/menus/documents/risk_managers/200708%20is%20it%20really%20alpha.pdf for my August Risk magazine column discussing this issue in more detail.
I am curious how readers view this issue. If hedge funds really are producing “pure alpha” returns, how does one explain the rash of synchronized losses we are seeing currently?