RT Journal Article
SR Electronic
T1 Alpha-Beta Recombination:<em>Can Synthetic Fixed Income Compete with Traditional Long-Only Managers?</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 80
OP 101
DO 10.3905/JPM.2009.35.2.080
VO 35
IS 2
A1 Brian Upbin
A1 Vadim Konstantinovsky
A1 Bruce D Phelps
YR 2009
UL https://pm-research.com/content/35/2/80.abstract
AB The authors investigate properties of synthetic fixed-income portfolios created by “recombining” a synthetic beta exposure with several hedge fund–based alpha sources. The recombination strategy has a risk/return profile superior to that of traditional long-only managers. But in order to implement the synthetic strategy, investors must pick fund managers. Manager selection risk is substantially greater in synthetic fixed-income portfolios compared to long-only ones, and incorporating this ex ante manager selection risk reduces the appeal of synthetic fixed income. Adequate diversification of this risk requires investing in at least five different hedge funds, which may increase the strategy’s costs and diminish its attractiveness. The authors demonstrate that a more efficient way to deal with manager selection risk is a synthetic replication of hedge fund returns with liquid derivatives.TOPICS: Portfolio construction, counterparty risk, statistical methods