Towers Watson (TW) does a nice job explaining the relationship between smart beta and hedge funds in their research paper, "Into a new dimension: An alternative view of smart beta". TW provides a strong case for the fact that most of the return coming from hedge funds is through different forms of beta and not alpha. Most of the returns can be associated with different forms of beta measures. The betas can explain a lot of the return variation.
TW provided the chart above to discuss what are the different types of beta that are available or can be used to explain returns. They make a distinction between "bulk beta" which would be the traditional asset class betas that have been measured against benchmarks like the S&P 500 or the Barclays bond index and alternative beta which would be related to other factors. The alternative betas would include such factors as carry, momentum, and value.
TW provided the chart above to discuss what are the different types of beta that are available or can be used to explain returns. They make a distinction between "bulk beta" which would be the traditional asset class betas that have been measured against benchmarks like the S&P 500 or the Barclays bond index and alternative beta which would be related to other factors. The alternative betas would include such factors as carry, momentum, and value.
TW also provides a definition chart on the difference between old and new beta or alpha. The percentage explained by beta may be more than what most investors expect, but hedge funds can still provide strong value through their dynamic use of beta. The important issue is that a fund provides diversification through low correlation and consistent positive return.
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