Editor's Letter: An Alternative Examination of the Costs and Benefits of Allocations to Alternatives
Hossein Kazemi, Aaron Filbeck
Wozu (Whereto) Hedge Funds? The Case of Equity Long-Short Strategy
Masao Matsuda

Just as the “alpha” of traditional, long-only active managers has been called into question, so too has that of hedge fund managers. What once was considered “alpha” may very well be just another source of systematic risk. With a growing number of hedge fund replication techniques available to investors, liquid alternatives and factor investment strategies might make for a better, or at least more relevant, benchmark for hedge fund strategies. Hedge fund managers, specifically equity long-short managers, will need to deliver a true value proposition if they are to remain competitive. These potentially include investments in smaller capitalization stocks, activist investments, quantitative investing, and co-investments.

Fallen Angels: The Last Free Lunch
Paul L. Benson, Manuel Hayes

Fallen Angels, defined as bonds that have recently made the transition from investment grade to speculative grade, offer an interesting alpha generation opportunity, driven primarily by the structure of the market. Investors who buy Fallen Angels benefit from the inevitable forced-selling by the far larger, often passive, investment grade market into the smaller, often active, high yield market. Fallen Angels are often higher quality than the rest of the high yield market, meaning they face a high probability of being re-upgraded later. In an environment where outperformance is slim if not scarce, Fallen Angels might present an interesting alpha generation opportunity.

Value is Dead, Long Live Value
Chris Meredith

Value investors have experienced one of the worst periods of underperformance, in length and magnitude, in history relative to growth investors. Regardless of what value metric one considers, this performance has led many to question the validity of the strategy going forward. However, what value investors are experiencing is very similar to the 1926-1941 period when growth investing dominated value investing. Whether it’s the mid-1900s or today, both time periods share a common trait: technological revolution. History would suggest that once new technology has matured and become assimilated into the broader economy, earnings expectation for growth stocks tend to revert to the mean and value investing sees its day in the sun once more.

Hedging the Real Risk of Private Equity
Peter van Dooijeweert

When investing in private equity, investors typically find comfort in the low volatility of reported earnings, but caution may be warranted as these numbers may not be an accurate reflection of the potential risk’s investors face. As valuations continue to rise for PE acquisitions, the tail risk of these new investments grows substantially. Developing hedging techniques would isolate the contribution of the illiquidity premium and improved management to total returns, thus allowing one to reduce much of the noncontrollable and non-unique risks that PE investors face relative to public investors.

Diversification Study - Trend towards More Concentrated Primary Portfolios
Andrea Carnelli Dompé

Diversification is a widely accepted risk management tool in the portfolio construction process, but the addition of more underlying investments increases the benefits of diversification at a decreasing rate. While many studies apply this concept to public markets, it can also be applied to private equity funds and private equity funds of funds (PFoFs). Building a diversified portfolio certainly has its benefits, but once the optimal number of funds is reached, the addition of more funds can begin to overshadow the benefits of manager selection.

The Technology Frontier: Investment Implications of Disruptive Change
Taimur Hyat, David Klausner

Once again, the world appears to be in an era of rapid technology-driven disruption and, this time, disruption is likely to occur across multiple facets of our economy. This paper explores three main topics in regard to technological innovation. First, the authors discuss the impact technology has had on the global economy. In fact, many of the benefits to economic measurements, such as labor productivity, may not even be fully incorporated into current macroeconomic data. Second, the authors discuss the impact technology will have on certain industries. Technology will no longer constrained to a certain sector, rather it will be integrated into other industries such as real estate, automotive, and retail. Third and finally, the authors discuss the impact of technology on the investment process. From individual securities, to in-house investment teams, to third-party managers, the role of an investor will be forced to adapt as disruption continues.

Why the Market Gets Sustainable Investing Wrong
Wendy M. Cromwell

The complexities or sustainable investing makes for a relatively inefficient market segment. Investors often ignore or discount important information that, if considered, could provide the opportunity for alpha generation. This paper identifies five key inefficiencies: the market’s focus on short-term growth, inconsistent ESG ratings, under exposure to structural development in emerging markets, blind spots in climate risk analysis, and an undefined impact investing universe. The paper also addresses how these five inefficiencies are exploitable.

The CAIA Endowment Investable Index
Hossein Kazemi, Kathryn Wilkens
The List: Alternative Indices
The CAIA Association