Factor/Style Investing

Alpha Transfer in a Hedge Fund World

Topics - Factor/Style Investing Multi-Style Alternative Investing Hedge Funds

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Alpha Transfer in a Hedge Fund World

CFA Proceedings Quarterly

In theory, portable alpha is a good idea. There is no reason why an investor’s choice of benchmark or asset class exposure needs to be tied to the source of alpha. If alpha can be generated from more fertile areas, such as hedge funds, investors should be allowed to take advantage of them.

Given the structure of the marketplace, a portable alpha strategy can be readily applied to a fixed-income mandate. Before alpha can be ported, however, it must be found, which raises several interesting points:

  • Hedge funds are a natural place to look for uncorrelated alpha.
  • In the search for alpha, investors must cautiously examine hedge funds’ reported returns, because the broad universe of hedge funds may be more correlated with the market than many think.

  • Our analysis shows definite lags (whether accidental or intentional) in the mark-to-market valuations of hedge funds, and once these lags are accounted for, hedge fund betas rise significantly.

  • If these higher betas are taken into account, at least at the index level, hedge funds do not appear to add a lot of value.

Basically, our research does not intend to make any statements about whether hedge funds in general are good or bad, but when investors look to hedge funds as a source of portable alpha, they should be careful when interpreting the return data. In particular, investors should be mindful of the illiquidity problem for securities held in hedge funds; this issue is not trivial.

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.