Spring Mountain Capital's Proprietary White Paper Advocates Using Shorter-Term Market Timing or "Active Beta" to Generate Alpha

Aug 04, 2011, 08:37 ET from Spring Mountain Capital, LP

NEW YORK, Aug. 4, 2011 /PRNewswire/ -- Spring Mountain Capital, LP (SMC), an investment management firm that focuses on alternative asset investing, today released a proprietary white paper, titled "Evidence in Support of Shorter-Term Market Timing" to evaluate the investment benefits of market timing or "active beta" strategies and its impact on improving alpha performance, particularly for hedge funds.  

Co-authored by Haim Mozes, Ph.D., a Senior Consultant with SMC and Serge Cooks, CFA, Quantitative Analyst at SMC, the white paper outlines how market timing is possible over shorter time periods typically considered by investors and that market timing is the source of at least half of hedge fund alpha, contrary to the general industry view.  Key highlights include:

  • Hedge funds do successfully time their market exposures and market timing is a source of hedge fund alpha – Evidence shows that hedge funds engage in "active beta" management to generate returns by increasing their beta exposure when markets perform well and decreasing their beta exposure when markets perform poorly.  
  • In contrast to conventional wisdom, market timing can be successfully executed over relatively short horizons using observable market data – Since market timing is effective even over the shorter time periods in which institutional asset allocation approaches typically operate, asset allocation decisions should allow greater differences from the strategic benchmark than the typical 10%.
  • Market timing strategies are appropriate for both institutional and individual investors Investment vehicles for individual investors should be developed with a market timing objective and institutions open to investing in hedge funds should be open to market timing strategies, as it is one of the key strategies employed by hedge funds. In particular, model-driven timing rules with subjective and buy/sell points may significantly improve performance.

"Investors usually focus only on alpha generation.  Market timing strategies are about managing the timing of beta exposure in the market or using 'active beta' to generate alpha.  'Active beta' contributes to an average of over 2% per annum to hedge fund returns.  By taking a disciplined approach through the use of formal or heuristic models, it can lead to significant reduction in the volatility generated by a portfolio's equity allocation.  Our findings also show that market timing strategies can be successfully executed over far shorter time horizons of a month than the typical three- to five-year horizons that investment firms look at," commented Mr. Mozes.

In the white paper, SMC focuses on two components of evidence on market timing. Firstly, that quantitative signals typically used in market timing algorithms have predictive power and secondly, that the incorporation of these signals into a tactical asset allocation system can significantly reduce the volatility generated by a portfolio's equity allocation.  

Results from both a static portfolio which held the S&P 500 for the 1990-2009 period and those of a timing portfolio for the same period were used as part of the white paper research.  Technical and valuation signals were examined and results showed that annual returns of an S&P 500 investment over the past 20 years would have a 1.1% higher annual return, roughly one-third lower monthly volatility, and roughly double the Sharpe ratio if the market timing approach was used each month to determine whether to be invested in cash on in the S&P 500.

"Market timing or 'active beta' strategies provide a 'clean' method of risk reduction and are practiced by sophisticated investors including hedge funds that have the flexibility to adjust their exposures.  To capture the benefits of market timing, investors need to react quickly to the complexity of timing signals.  Our research shows that investors should consider looking at investment vehicles with an 'active beta' objective to create greater returns," added Mr. Cooks.


Founded in 2001 and located in New York, New York, Spring Mountain Capital, LP ("SMC") is a private investment management firm that focuses on alternative asset investing and offers investors a wide range of strategies designed to produce attractive risk adjusted returns. SMC has a dynamic and opportunistic mindset with a client oriented focus that drives it toward providing investors with intelligent and sophisticated investment opportunities. Based on its extensive network of personal and professional relationships, SMC is constantly searching for insightful investments from a wide range of sources. For further information, please go to www.springmountaincapital.com.

Wendy Furrer
Spring Mountain Capital LP
Telephone: 212-292-8317
Email: wfurrer@smcinvest.com

SOURCE Spring Mountain Capital, LP