Institutional Investor's Alpha Magazine - March 2008 - (Page 36) Interview David Shukis Interview David Shukis Watching By Frances Denmark he beta police are on high alert at Cambridge Associates, ferreting out market exposure — a.k.a. beta — in the hundreds of custombuilt portfolios under their supervision and telling clients when hedge funds are delivering alpha and, increasingly, when they’re not. “When there’s a lot of risk in the market, you want to be sure you don’t have too much beta in your hedge fund portfolio because it Roiling markets have will participate more fully pushed David Shukis, in market declines,” says David Shukis, head of head of the hedge fund hedge fund research and consulting at the Bostonpractice at Cambridge based f irm, one of the most inf luential adviser Associates, and his groups in the industry. team to wring out the Because investors pay outsize fees to particimarket risk in clients’ pate in hedge funds, they rightly expect them to hedge fund portfolios. perform better than the markets, in both up times and down. And down the markets have been. The Standard & Poor’s 500 index — a popular proxy for the U.S. equity market — sank by 6 percent in January and 3.25 percent in February. Hedge funds, by comparison, did far better. They were down, on average, 2.4 percent in January, according to Chicago-based firm Hedge Fund Research, but rose 2.5 percent in February. Cambridge Is T When equity markets were perking along, consultants didn’t have to worry so much about market damage to hedge fund performance. But the return of the bears has triggered a fresh push to uncover market risk. “Measuring beta is both a science and an art,” Shukis, 56, explains. Beta, by definition, is the correlation an investment has to the market. Many hedge funds aim for beta neutrality by adopting strategies that protect their holdings regardless of what the market does. This is where alpha — that certain something a manager is supposed to deliver in outperforming the market — comes in. “If you really know the managers well, over time you have a reasonable expectation of how they will behave in different market conditions,” Shukis says. This approach has limitations, however. The nature and structure of the portfolios change over time. A fund that has had a low beta historically can potentially have a higher net exposure to the market today. “We’re trying to be very vigilant about that,” notes Shukis, who was working on a Ph.D. in history at Brown University when he changed course in midstream and ended up earning an MBA at Harvard Business School. After stints at the Bank of Boston and the Bank of New England, he signed on as a generalist consultant at Cambridge Associates in 1989. Cambridge’s largest clients at the time were big institutional endowments — including those of Harvard University, Princeton University and Stanford University — none of which had more than about 1 percent of their holdings in hedge funds. Today about half of the fi rm’s 182 endowment and 159 foundation clients have holdings in hedge funds, 36 • INSTITUTIONAL INVESTOR’S ALPHA • MARCH 2008
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.