PT  - JOURNAL ARTICLE
AU  - Brian Upbin
AU  - Vadim Konstantinovsky
AU  - Bruce D Phelps
TI  - Alpha-Beta Recombination:<em>Can Synthetic Fixed Income Compete with Traditional Long-Only Managers?</em>
AID  - 10.3905/JPM.2009.35.2.080
DP  - 2009 Jan 31
TA  - The Journal of Portfolio Management
PG  - 80--101
VI  - 35
IP  - 2
4099  - https://pm-research.com/content/35/2/80.short
4100  - https://pm-research.com/content/35/2/80.full
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