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Alternative Market Briefing

Crisis alpha and risk in hedge fund and managed futures strategies

Wednesday, April 20, 2011

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By Florian Guldner, Opalesque Asia:

Alternative investments focus on many different asset classes and markets. Being subject to relatively loose regulation, many strategies are able to deliver alpha in market downturns. A paper authored by Kathryn Kaminski and Alexander Mende, investment analysts at RPM Risk & Portfolio Management investigates the risks different hedge fund and managed futures strategies are exposed to and identifies which ones are most likely to deliver alpha in crisis periods.

The underlying risks in alternative investments can be divided into three groups: Price risk, credit risk and liquidity risk. In times of market crisis, most market participants are long-biased and forced into action. They become synchronized in their actions, creating losses for investment funds that are most exposed to liquidity and credit risks.

In oder to distinguish which investment strategies are able to perform well in market downturns and which are not, Kaminski and Mende decompose investment performance into a risk free rate, a risk premium representing performance gained by taking different risks outside of crisis periods and a "crisis alpha"performance. They then analyze the effect each of the risk groups has on crisis alpha.

Defined as the risk of markets moving in an unfavorable direction, price risk is most r......................

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