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Benedicte Gravrand, Opalesque London:

Managers at the recent Opalesque Germany Roundtable discussed the complexities of hedge fund selection. In particular, the difficulty in explaining alpha, the lack of information in simple performance numbers, transactional data analysis, and traditional fund analysis.

Historical alpha not a signal for future alpha It’s generally still the case that investors expect hedge funds to deliver alpha without any dependence on any markets, said Dr. Thomas Maier, a lecturer and a senior investment manager at FERI Trust, an asset manager for family assets and institutional investors in German-speaking Europe.

But alpha, he noted, cannot yet be explained by simple models. Investors should seek hedge funds that offer certain types of exposure to market inefficiencies, trading techniques and alternative betas rather than the elusive alpha. "Most of the times when people talk about alpha, it's actually more or less a statistical artefact from doing an often too simple linear regression. The model they are using is nothing more than a one or two-factor model of traditional asset classes. So this is a major misconception and problem for most investors to identify the real return sources of hedge fund strategies."

"By definition, alpha is more or less just the final result of a regression based on historical return data," he continued. "If we can completely explain the returns, there is no alpha left. And vice versa: a......................

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