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Alternative Market Briefing

MA Capital: A robust absolute return portfolio contains systematic beta

Monday, July 15, 2013

Benedicte Gravrand, Opalesque Geneva:

According to Monty Agarwal, chief investment officer at MA Capital Management, an investment management firm based in Palm Beach Gardens, FL, the most robust absolute return portfolio he can find has systematic beta.

In a recent paper titled Constructing a Robust Absolute Return Portfolio, Argawal, who defines an absolute return portfolio as one that "strives to provide positive returns over any distinct time period, regardless of the performance of the relevant index, such as the S&P 500 Index," starts by reminding the reader that "constructing such a portfolio requires asset classes that exhibit return and volatility characteristics that are not correlated to other assets in the portfolio."

Historically, absolute return portfolios initially used to contain a mixture of long-only assets (stocks and bonds). Then global securities were added, including emerging markets and frontier markets’. Eventually, alternative strategies (hedge funds, managed futures, real estate, etc.) also became part of the mix.

But correlations are not stables and market returns are not normally distributed, the paper says. Furthermore, past data reveals that a portfolio of alternatives assets only does not produce alpha consistently. In his paper, Argawal shows "how the hedge fund index beta to the S&P 500 Index is quite high and higher still during large volatil......................

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