Yet more fund discussion!

As you can imagine, I have been having long discussions with colleagues (former and ex-) regarding the future of funds (CLOs, hedgefunds , FoFs).  Traditionally, assets achieve a beta rating based on their performance correlation to an index (Dow, S&P500) etc.  The alpha rating is how the fund manager performs to the market.

Now, here's what's happening - hedge funds used the alpha and beta to identify assets and invest and then offset the risk with a hedge.  CLOs bought assets with beta's that matched the strict grids that were dictated by rating agencies, Funds of Funds ran around trying to figure out what the funds that they invested into were doing.

So, everyone forgot about good-ol'-credit risk and counterparty risk.  So you bought a hedge from Lehman?  Did you really think Lehman matched its risk book every day?  Did you really think that the CDS provided by AIG was backed by cash?

Now the conundrums,

a) I am a firm believer (call me a heretic) that funds and other structured financial products are a key part of the global liquidity fabric.  Banks never really held anything on their balance sheets - they passed the funding risks on to their CD holders - guaranteed by the FDIC and other global agencies dontcha know.

b) Funds of all types are reevaluating the 'quant' portfolio management methodology and realizing that the beta of the asset and alpha of the fund manager are good datapoints but so is credit risk of the underlying asset (can the company pay in full and on time) and the counterparty risk (who is selling me this asset/hedge?)  

c) As reported by the WSJ, funds are going through a significant change as traditional sources of capital - pension funds, university endowments, college tuition funds - are demanding more accountability and questioning the 'quant' management methodology.

d) Structured funds are critical to the required liquidity for efficient capital allocation to highest returns.  The various governments cannot keep funding liquidity through money-printing.

e) I haven't figured out the global fund metrics yet - but when I do - you, dear reader, will know.

Best.  Maurice.