Uncorrelated Alpha Strategies Detail

As we have repeatedly noted over the years, actively managed strategies whose objective is to produce returns with low or no correlation with the returns on major asset classes (so-called "uncorrelated alpha strategies") have an undeniable mathematical benefit for a portfolio. Moreover, the potential size of this benefit increases with the portfolio's long-term real rate of return target. On the other hand, we have also repeatedly noted that, for a wide range of reasons, active management is an extremely difficult game to play consistently well, and that this challenge only increases with time. Hence, in our model portfolios, we have tried to strike an appropriate balance between these two perspectives. We start by limiting allocations to uncorrelated alpha to no more than ten percent of a portfolio. We then equally divide this allocation between four different strategies. Within each strategy, we track the performance of two liquid, retail funds which can be used to implement it, and which have far lower costs than the 2% of assets under management and 20% of profits typically charged by hedge fund managers using the same strategy (for more on the advantages of such funds, see "How Do Hedge Fund Clones Manage the Real World?" by Wallerstein, Tuchshmid, and Zaker). The following table shows the year to date performance of these funds (which are listed by ticker symbol):

| Table: Market Implied Regime Expectations and Three Year Return Forecast | Global Asset Class Returns | Financial Advisors' Corner: Personality, Risk Tolerance, and Adaptation to Loss | Uncorrelated Alpha Strategies Detail | Overview of Our Valuation Methodology | Global Asset Class Valuation Updates Detail through October 31, 2010 | Product and Strategy Notes: Savings Rates in US and Comparison; Influenza; Illiquidity Risk and Return Premium | Feature Article: Active Versus Passive Investing: A Synthesis of Recent Research | Investor Herding Risk Analysis | October/November 2010 Double Issue: Key Points | Table: Fundamental Asset Class Valuation and Recent Return Momentum | This Month's Letters to the Editor: Criteria Used to Reach Conclusions About Asset Class Over and Under Valuations?; What Publications Do You Find Most Useful? |