Visting

Australia last month to tout AQR Capital Management’s hedge fund beta process as an alternative to hedge fund benchmarks, AQR Capital Management’s Ronen

Israel reminded us that at its height, three managers investing in Bernie’s faux fund comprised 40 per cent of the CS Tremont equity market neutral index.

The value of those funds has since been taken to zero, which makes all the surviving funds suddenly look like heroic outperformers, and undermines the assumptions of anyone who ever invested in a market neutral strategy. Madoff wasn’t the only one doing strange things to hedge fund indices. We all know that John Paulson’s hedge fund, Paulson & Co., made a motzer from shorting the subprime crisis.

What’s not so well known, says

Israel, is that the benchmarkers had him classified as a merger arbitrage manager, a discipline at best distantly related to the trades he was actually making. Since last October, AQR has been managing the DELTA Fund (it stands for – wait for it – Dynamic Economicially intuitive Low leverage Transparent Alternative) which makes all the obvious, beta-capturing trades across the nine major hedge fund styles.

Israel says funds should be comparing the performance of their ‘active’ hedge fund managers to DELTA, rather than the likes of a CS Tremont index, because the 3000 positions it holds at any one time represent pure beta across the nine categories.