Hedge Fund Replication by TrueBeta
The first fully independent, fully transparent approach
TrueBeta Dynamic Exposure                                                          info@true-beta.com

TrueBeta announced the launch of its dynamic exposure multiplier in January 2010, believed to be a first for hedge fund replication. Dynamic exposure aims to reflect the impact of variations in average hedge fund leverage across market cycles.

Leverage has not been a significant factor in the past three years, while the long term record shows the potential for dynamic leverage to avoid extreme losses:

Cum Returns TrueBeta TrueBeta HFRI HFRX

Standard Dynamic

Rolling 12 Months 3.50% 3.66% 9.25% 6.31%
Rolling 36 Months 7.30% 6.90% 10.11% 2.23%
R12M to Feb '09 -21.76% -16.40% -19.08% -20.88%
May 2004 – Jan 2012 48.09% 53.66% 70.74% 9.92%

It has been long recognized that hedge funds generate their returns within a frame-work of long and short exposures, to which they apply varying degrees of leverage. Most importantly, the level of leverage varies over time depending on market conditions.

The market turmoil in recent years has brought the impact of variations in leverage into sharp focus. Although there is a relative paucity of data, and a divergence of definitions for leverage underlying the data that exists, the basic pattern of leveraging into rising markets and deleveraging in falling ones has been clearly demonstrated. Below are two charts that illustrate the pattern, and the typical range of leverage between 1-2:

The original TrueBeta methodology recognized the importance of leverage in hedge fund returns, by applying a static multiplier to the monthly risk factor exposures. The new dynamic leverage model enables TrueBeta to explicitly reflect the impact of changes in hedge fund leverage across market cycles, by applying a dynamic (variable) multiplier to the basic factor exposures on a monthly basis.

TrueBeta's research indicates that changes in leverage are driven primarily by broad trends in market returns, although changes in market volatility and other risk considerations also play a role.

Consequently the TrueBeta dynamic leverage model is based on return trends in major market indices, currently primarily the S&P 500.

The new methodology was introduced over a transition period to May 2010, and has now been incorporated as a standard feature of the TrueBeta methodology. 

A Note on the TrueBeta Exposure Multipliers
Although TrueBeta's static and dynamic factor multipliers aim to reflect the impact of hedge fund leverage, the TrueBeta strategy itself is not leveraged. Reflecting hedge fund leverage in this context refers to increasing the aggregate factor exposure beyond that indicated by the model, effectively reducing the amount of cash in the strategy (please see the Methodology section of the web site for further detail). It does not, in other words, involve borrowing.