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By Beverly Chandler, Opalesque London: A new case study from Markov Processes International reveals how their predictive analytic techniques could be used to reproduce beta exposures of hedge funds. Using MPI’s research, the firm tried to capture dynamic betas embedded in the $23bn Bridgewater Pure Alpha II Fund. This fund is the flagship fund of Bridgewater Associates - the world’s largest alternative investment management firm with $125m under management. The fund has a target volatility of 18%.

In terms of analysing the fund’s performance, particularly against its peers, MPI calculated a sub universe of 61 funds drawn from the HFR, EurekaHedge and HedgeFund.Net hedge fund databases. They found that between January 1992 and November 2011, Bridgewater Pure Alpha II’s annualized performance was 14.44% with an annualized standard deviation of 14.60%.

MPI was able to identify that the Bridgewater Pure Alpha Fund II and the two other funds from the peer analysis – Millennium International and GAMut Investments – had significantly outperformed the S&P 500 Index.

However, beyond that, MPI says: "The different performance paths of these funds suggest that the impressive outperformance over the various market cycles of the past twenty years stem from very different alpha and/or beta investment strategies employed by the fund managers".

The firm decided to drill down further to find out how the outperforman......................

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