{"id":20591,"date":"2011-10-07T01:23:00","date_gmt":"2011-10-06T23:23:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/management-of-hedge-fund-portfolios-during-crisis-periods-the-contribution-of-systematic-overlays\/"},"modified":"2019-12-30T22:18:29","modified_gmt":"2019-12-30T21:18:29","slug":"management-of-hedge-fund-portfolios-during-crisis-periods-the-contribution-of-systematic-overlays","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/management-of-hedge-fund-portfolios-during-crisis-periods-the-contribution-of-systematic-overlays\/","title":{"rendered":"Management of hedge fund portfolios during crisis periods: the contribution of systematic overlays"},"content":{"rendered":"\nWhy overlays?<\/strong>\n\n\nDuring transition periods from growth to risky environment it\nis not straightforward to manage the risks carried by alternative allocations. This is especially the case for hedge fund allocations, which\nexhibit low level of liquidity (quarterly or monthly at best) and which exhibit significant inertia. In the case of UCITS or managed account allocations which are more liquid, market risk management can be\ntricky in the short term. Beyond the liquidity issue, large scale rebalancing can cause operational issues: significant concentration of the allocation in certain investment styles, frequent in and outs can be\nproblematic with certain managers, exiting from closed funds…\n\n\nThe implementation of overlays can be a good alternative to large scale rebalancing. This type of hedging technique lies on the identification of the systematic risks embedded by the underlying funds, and by the implementation of effective hedges with liquid instruments (future contracts). The first advantage of this approach is that it allows the investor to keep its allocation unchanged. The hedge can\nthen be triggered, waiting the confirmation of a trend which would validate the reallocation of the portfolio. The second advantage is that this approach does not require high amounts of cash (deposit x\nbeta). Finally, the overlay can be priced in real time and be liquidated at anytime.\n\n\nDiscretionary vs. systematic overlays<\/strong>\n\n\nIn addition to the problems inherent to the identification of the risk exposures and the choice of hedging instruments, the timing of the trigger of the overlay is a central issue. Two options are available to\ninvestors and multimanagers. The first is based on the discretionary trigger of the overlay, depending on the investor views. From our point of view, this solution is not efficient, because medium term views\nare already reflected in the tactical allocation. The second approach is based on the use of a systematic signal to trigger the overlay. The major advantages of the latter are the objectivity of this approach and\nthe ability to set up contrarian views.\n\n\nImplementation<\/strong>\n\n\nThe overlay process requires the use of specific quantitative tools:\n\n\n\n