Alternative Beta

Philosophy

The ING Alternative Beta Strategy is a unique concept that offers hedge fund like returns at low cost and in a transparent way. This sophisticated concept is different from traditional funds offering hedge fund exposure. The target is to replicate a broad based hedge fund index using investments in a limited set of traditional market factors using a rule based strategy. The goal of the replication model is to identify the relevant exposures to traditional betas and dynamically adjust those exposures to mimic the hedge fund index returns closely. The fund has the ability to take short exposures, use the total risk budget in a flexible way and take exposure to less traditional asset classes like volatility and commodity indices. The allocations to risk factors are based on a regression model with the selection of factors based on assumed explanatory power with respect to hedge fund returns and taking into account liquidity, transparency and implementation costs. Over time, some divergences are expected to occur between the returns the strategy seeks to replicate and the actual return that is generated. Over short time frames, replication returns will have some tracking error with the hedge fund index returns, and long-term hedge fund index returns may exceed the strategy's returns if hedge funds produce unique positive alpha (which cannot be replicated). All investment decisions are generated by our quantitative model.

Objective

The main objective of the ING Alternative Beta strategy is to outperform the HFRX Global Hedge Fund Index.

Process

ING Investment Management has developed a sophisticated model to align with the risk-profile of the HFRI Fund Weighted Composite Index. With these modelling techniques we seek to closely replicate hedge fund index returns combining a selection of traditional market investments. By investing in this selection of liquid market instruments and dynamically managing the allocations, we seek to construct a portfolio that generates attractive hedge fund index returns with high accuracy. The strategy is rebalanced on a monthly basis as soon as the first publication of the monthly data of the HFRI Fund Weighted Composite Index is available. The regression model is updated with the new available information to determine the new weights of the factors. According to these weights the strategy is rebalanced. The new weights are implemented in the portfolio as efficiently as possible using only very liquid instruments so trading costs will be limited.