Alpha Squared - Enhanced Hedge Fund Index Solution - Alpha Generation via Tactical Style Tilts.pdf

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ALPHA2 ENHANCED HEDGE-FUND INDEX SOLUTION Alpha Generation via Tactical Hedge Fund Style Tilts Credit Suisse/Tremont investable hedge fund indices

GOAL § To maximize the risk-adjusted total return of a diversified portfolio of hedge fund sub-indices by actively overweighting and underweighting the components of the strategic portfolio KEY PRODUCT DIFFERENTIATING FACTORS § Innovative Solution: Alpha to be generated over and above Credit Suisse/Tremont investable hedge-fund index based on statistical evidence of the predictability in hedge fund sub-index returns § Transparent Quantitative Process: A disciplined approach based on robust quantitative processes from initial long-term derivation of longterm optimal weights to the derivation of tactical alpha tilts § Optimal Portfolio Construction: Equilibrium portfolio weights to be devised so as to meet investor’s objectives i.e. low correlation to traditional asset classes, maximum expected information ratio, low drawdown risks, or a combination of non-mutually exclusive objectives and constraints. § Market and economic intuition: Signals driving alpha tilts to be based on systematic risk factors, consistent with market and economic intuition THREE STEPS CONSTRUCTION PROCESS 1. Strategic Allocation: A disciplined and robust portfolio construction framework based on state-of-the-art risk quantification and management techniques a. Application of correction techniques to overcome biases associated with hedge fund sub-indices b. Non-linear dependence techniques to be applied to generate optimal equilibrium hedge fund basket weights (Rank Correlations, Copulas) c. Equilibrium portfolio allocations to be derived incorporating several predefined risk criteria and to be assessed with multiple methodologies (Reverse Mean-Variance optimization, Value at Risk (VaR) and modified VaR, Copula/Extreme Value Theory optimizations) d. Optimal allocation to include all predefined investor specifications and risk preferences

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