As highlighted on Finextra.com, Chris Skinner has written an informative commentary on developments in cross-asset trading and the search for liquidity. Entitled The Quest for Alpha, this article should be a must read for all capital markets and risk management professionals who are interested in the subjects of liquidity risk, electronic and algorithmic trading, hedge funds growth (and influence), and the on-going technology transformation in a trading world where nano-sconds matter.

Alpha is that part of investment return that an asset manager or hedge fund produces that is uncorrelated with general market returns (often referred to as Beta). High Alpha returns generally also very richly reward "long/short" investment professionals under incentive compensation schemes such as hedge fund "Two and Twenty" fees arrangements. Toomre Capital Markets LLC ("TCM") previously has written about True Alpha and Hedge Fund Beta in highlighting two excellent articles written by Clifford Asness. Mr. Asness is currently the managing principal of AQR Capital Management LLC and previously headed the group that started Goldman Sachs Asset Management ("GSAM") quantitative strategies and its Global Alpha hedge fund.

The Journal of Portfolio Management has two very enlightening articles written by Clifford Asness, a managing principal at AQR Capital Management, LLC, about hedge funds. The first article An Alternative Future – Part I in the 30th Anniversary issue of JPM lays out the positive case for hedge funds in the construction of investment portfolios. The subsequent article in Fall 2004 issue An Alternative Future – Part II discusses some of the issues from the darker side of hedge fund investing. The articles together make an excellent framework for the much needed discussion about the relative value of hedge funds, especially as defined benefit and other pension plans consider upping their allocation to the Alternative Investments asset class. (Hat tip to Barry Schachter at Bel Ranto blog.)

Toomre Capital Markets LLC encourages interested parties to join the discussion about how to obtain true Alpha returns and at what cost. The discussions about Hedge Fund beta and what associated fees are "appropriate" no doubt will continue to be lively.

The Wall Street Journal also has another article today entitled “Hedge Fund GLG Is Probed on Role of Star Trader” that details on-going regulatory investigations into the activities of GLG Partners and Philippe Jabre. This is the same hedge fund and star trader mentioned at the bottom of this TCM post. The WSJ article details how regulators are looking into the activities of Mr. Jabre and GLG Partners’ $1.85 billion convertible-bond arbitrage portfolio known as GLG Market Neutral Fund. Hector Sants, managing director at Britain’s Financial Services Authority, said at a speech in September 2005, “Some hedge funds are testing the boundaries of acceptable practice concerning insider trading and market manipulation.” The FSA is looking into the 2003 issuance of a convertible bond offered by Sumitomo Mitsui Financial Group that was underwritten by deal manager, Goldman Sachs. The French Financial Markets Authority is looking into two convertible bonds issued by Vivendi Universal and Alcatel. The funds that the French regulators are focusing on include GLG Partners, UBS AG’s O’Connor, Meditor Capital Management, Ferox Capital Management and Marshall Wace Asset Management.

Here are some thoughts (with associated ‘TCM smart’ links) provoked while reading today’s edition of The Wall Street Journal: