WEST PALM BEACH, FL (www.hedgeco.net) – As trading opportunities decline in the markets, hedge fund managers have increasingly turned to trading risk premiums and alternative betas to generateabsolute returns for their investors. According to Ian Morley, the chief executive of Dawnay Day Olympia hedge fund management firm, “Alternative betas are returns generated from exposure to forms ofsystemic risk, they include factor timing, volatility risk, default risk and liquidity risk … and are in addition to the alpha returns that investors seek from hedge fund manager skills.”

Jaakko Karki, chief investment officer at UK-based Attica Alternative Investments, told Reuters, “Hedge funds are turning more to capturing alternative premia from the market … There are no capacity limits as yet in premia markets.”  Karki explained, “While Alpha returns are the highest quality returns sought after by hedge fund managers; however the recent influx of money into hedge funds and subsequent competition, as well as low market volatility, have reduced the alpha return-generating opportunities.”

Market experts think that the weight of new assets chasing new arbitrage opportunities in the markets means that such opportunities will immediately disappear as soon as they are spotted by managers. The disappearance of opportunities has forced hedge fund managers to try new trading ideas. According to a new survey conducted by Edhec, nearly 70 percent of respondents of a new survey of institutional investors show that such investors were also aware that hedge funds have increasingly relied on exposure to alternative betas as a source of return.

 The pursuit of alternative premiums as a strategy has gained acceptance among institutional investors, such as pension funds and insurance groups. There is however some confusion about the differences between alpha and beta returns. While relative value strategies generally relate to strategies, “such as convertible bond arbitrage and long/short equity, which buy and sell assets on the basis that prices have temporarily shifted away from their fair values, global macro strategies which makes directional bets on bond, currency, commodity and equity markets based on economic trends are seen by some investors as a beta-type strategy.”

Paul Oranika
Contributing Writer
HedgeCo.Net
Email: Editor@hedgeco.net

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