Inside Money: How to hedge - a strategy for non-utility maximisers

For some time now the EDHEC-Risk Institute has been regularly updating me on the performance of the world's hedge fund markets.

This January, for instance, against a backdrop of a strong S&P 500 (up 4.8 per cent), some hedge funds did ok.

"Equity-focused strategies, having increased their net market exposure, as shown by dynamic betas significantly higher than their long-term counterparts, exhibited strong performance and reached a five-month high: Long/Short Equity (3.36 per cent), Event Driven (2.95 per cent) and even Equity Market Neutral (1.01 per cent)," the latest EDHEC hedge fund report says.

"In contrast, unsurprisingly enough, the Short Selling strategy (-6.85 per cent) recorded a massive loss."

After years of exposure to this sort of stuff, I kind of understand what it all means. I can even grasp why some of the headier articles on the main EDHEC website might be interesting to certain people.

Go there if you have ever wondered 'Is the Market Portfolio Efficient When Investors Are Not Utility Maximisers?' or cared enough about 'Sensitivity of portfolio VaR and CVaR to portfolio return characteristics'.

This is not for everyone. As the site says it "is aimed at professionals who wish to benefit from EDHEC-Risk's analysis and expertise in the area of applied portfolio management research".

Note the 'applied' part - there isn't much philosophising going on here. These are practical people; engineers trying to design more efficient portfolios.

As with all professionally-targeted publications, the EDHEC language is jargon-heavy and opaque to outsiders, but money people excel in head-spinning prose, eg:

"Issues of contemporaneity, liquidity, different restructuring clauses and market supply and demand, all contribute to the fact that the market quoted term structure of CDS index spreads does not always agree with the term structure of CDS index spreads implied by the CDS term structures of the constituent credits."

But as a recent article in The Economist explains, sometimes the high-level money language (in this case the hedge funds dialect) may have purposes other than professional clarity:

"Like our [hedge fund] peers we have also started talking a lot about how we are 'multi-strategy' and 'capital-structure agnostic', and boasting about the benefits of our 'unconstrained' investment approach," the article says.

"This is better than saying we don't really understand what's going on."