Hedge Fund Data
Beating the beta bandits?
An analysis of the returns of the hedge fund industry, such as that in Aurum’s latest hedge fund industry deep dive shows the large beta component of the overall hedge fund industry’s returns.
The chart below, taken from the report, illustrates that since the dramatic equity market losses in March 2020, when hedge fund strategies that derived a significant portion of returns from beta suffered notable losses, the component of returns derived from beta has continued to increase significantly. From 1st April 2020 to 30th September 2021, we can see that aggregated positive hedge fund performance has generated $685 billion dollars as observed by Aurum’s HF Composite Index and of that, $467 billion, over 68%, are attributable to ‘beta’.”
The below chart breaks down the returns of each of the component funds of the Hedge Fund Composite into beta, alpha and risk free (“Rf”) components. Alpha = actual return – Rf** – beta * (market return – Rf). These are then aggregated to show the dollar returns of the Hedge Fund Composite attributed to alpha/beta/Rf.
For note, beta can be negative in certain cases, creating negative dollar attributions. These are offset by corresponding positive alpha contributions.
Source: Aurum Hedge Fund Data Engine
So if an investor is looking to avoid beta driven returns, can they just avoid certain strategies?
Well, of course, it’s not that simple. Looking at long-term average beta to equities* in the chart above you can see significant dispersion of beta driven returns within strategy groupings.
Even those strategies that we would typically expect to have a higher beta to global equities, such as Long biased, Equity L/S and Event actually exhibit a high degree of intra-strategy dispersion in their realised beta. Some funds in these master strategy classifications exhibit low, or negative beta, so one should always be careful not to over-generalise and “tar all funds falling under a certain strategy grouping with the same beta brush”.
At Aurum, our view is that investors/allocators should have a clear idea of where returns are being generated. Asking if now is a good time to carry a significant degree of ‘beta risk’ in your portfolio is a separate question.
Investors shouldn’t be paying high fees for beta and they should be aware that ‘beta’ has contributed to a growing share of total hedge fund industry returns as observed by Aurum Hedge Fund Data Engine in the past 18 months. If investors want ‘beta’, it should be a conscious choice, and they should pay appropriate fees for the returns they receive.
But if your focus is on alpha, we would recommend investors ask the question, which strategies and which funds demonstrate alpha generation? And – by contrast – are there areas that are simply doing well because of an inherent beta bias during a major market bull-run?
*60 month (equally weighted) average beta to the S&P Global BMI Index by master strategy
**Risk free (Rf) is defined by a rolling 3m USD Libor, where market return is that of S&P Global BMI (‘the market index’) and where beta has been calculated with respect to each underlying fund observed on a 24m rolling basis to the market index. The monthly alpha, beta and Rf components are then applied to each underlying fund’s dollar performance for a particular month, and then at a master strategy or industry level the individual fund dollar contributions are aggregated up.
Data from the Aurum Hedge Fund Data Engine is provided on the following basis: (1) Aurum Hedge Fund Data Engine data is provided for informational purposes only; (2) information and data included in the Aurum Hedge Fund Data Engine are obtained from various third party sources including Aurum’s own research, regulatory filings, public registers and other data providers and are provided on an “as is” basis; (3) Aurum does not perform any audit or verify the information provided by third parties; (4) Aurum is not responsible for and does not warrant the correctness, accuracy, or reliability of the data in the Aurum Hedge Fund Data Engine; (5) any constituents and data points in the Aurum Hedge Fund Data Engine may be removed at any time; (6) the completeness of the data may vary in the Aurum Hedge Fund Data Engine; (7) Aurum does not warrant that the data in the Aurum Hedge Fund Data Engine will be free from any errors, omissions or inaccuracies; (8) the information in the Aurum Hedge Fund Data Engine does not constitute an offer or a recommendation to buy or sell any security or financial product or vehicle whatsoever or any type of tax or investment advice or recommendation; (9) past performance is no indication of future results; and (10) Aurum reserves the right to change its Aurum Hedge Fund Data Engine methodology at any time and may elect to suppress or change underlying data should it be considered optimal for representation and/or accuracy.
The S&P Global BMI (the “S&P Index”) is a product of S&P Dow Jones Indices LLC, its affiliates and/or their licensors and has been licensed for use by Aurum Research Limited. Copyright © 2021 S&P Dow Jones Indices LLC, its affiliates and/or their licensors. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
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This Post represents the views of the author and their own economic research and analysis. These views do not necessarily reflect the views of Aurum Fund Management Ltd. This Post does not constitute an offer to sell or a solicitation of an offer to buy or an endorsement of any interest in an Aurum Fund or any other fund, or an endorsement for any particular trade, trading strategy or market.
This Post is directed at persons having professional experience in matters relating to investments in unregulated collective investment schemes, and should only be used by such persons or investment professionals. Hedge Funds may employ trading methods which risk substantial or complete loss of any amounts invested. The value of your investment and the income you get may go down as well as up. Any performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable indicator of future results. Returns may also increase or decrease as a result of currency fluctuations. An investment such as those described in this Post should be regarded as speculative and should not be used as a complete investment programme.
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