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Evaluating the Performance of Alternative Strategies Relative to Long-Only Public Market Benchmarks

Jean L. P. Brunel
The Journal of Wealth Management Winter 2021, jwm.2021.1.146; DOI: https://doi.org/10.3905/jwm.2021.1.146
Jean L. P. Brunel
is managing principal at Brunel Associates, LLC in Bonita Springs, FL
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Abstract

The performance of alternative strategies is notoriously challenging to analyze. Beside the fact that managers often profess to be agnostic as to the kind of risk they should be taking, investors often seek a well-defined risk management process. The current literature provides solid insights as to the benefit of various forms of risk factor analysis, the results of which can then be used as a means to assess actual manager performance. This article follows on that line of thought, with an important modification: the use of rolling betas relative to a qualitatively identified public market proxy. We find that our results point to significant volatility in betas, suggesting that managers indeed vary their market risk exposure over time; on the other hand, we find that alphas derived from this methodology tend to be lower and less volatile than those computed based on a fixed strategic risk exposure. We postulate that our results may well be more representative of reality.

TOPICS: Real assets/alternative investments/private equity, performance measurement, analysis of individual factors/risk premia, risk management

Key Findings

  • ▪ Hedge fund performance is notoriously difficult to assess, particularly relative to a market benchmark. Trying to allocate return between market or risk exposure and skill and to allocate excess return between tactical risk management and security or instrument selection has been quite difficult.

  • ▪ Performance analysis practices within the asset management industry cover a wide range of approaches from peer comparisons to public market benchmarks.

  • ▪ The use of statistically computed beta factors relative to a qualitatively-derived principal strategy risk can afford a better perspective of public market opportunities and thus of relative performance analysis as compared with a public market benchmark.

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The Journal of Wealth Management: 25 (1)
The Journal of Wealth Management
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Evaluating the Performance of Alternative Strategies Relative to Long-Only Public Market Benchmarks
Jean L. P. Brunel
The Journal of Wealth Management Sep 2021, jwm.2021.1.146; DOI: 10.3905/jwm.2021.1.146

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Evaluating the Performance of Alternative Strategies Relative to Long-Only Public Market Benchmarks
Jean L. P. Brunel
The Journal of Wealth Management Sep 2021, jwm.2021.1.146; DOI: 10.3905/jwm.2021.1.146
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