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“Galleon” Alpha Analysis

“Galleon” Alpha Analysis

The aim of this document is to show the real life application of the ‘Style Analysis’ feature applied to a hedge fund claiming to deliver alpha.  We will show how to analyze a fund in terms of its alpha and sector selection skills. Galleon has been selected as fund in order to show how the ‘Style Analysis’ can be used as part of the due diligence process by highlighted anomalous monthly alphas. In the next sections, several steps by steps approach are presented in order to extract the monthly alpha for Galleon.
Step 1: Select the fund ‘Galleon Omni Technology’ monthly returns.
Figure 1           Galleon Monthly Returns

Step 2: Select the factors to which the fund should be exposed. In our case, we selected Technology and US Growth indices.
Figure 2           Factors Selection
Step 3: In the tab ‘Style analysis’, we see the following:
· In the last 24 months, the 4 indices explained 46% of Galleons returns changes.
· Galleon was short US Small Caps (yellow) and long HFN Technology (pink), since inception.
Figure 3           Galleon Last 24 Months Style Exposure
Step 4: In the tab ‘Cumulative outperformance’, a large part of Galleons returns (green) was ‘alpha’ (i.e. difference between the green line and the blue line) and a small part was due to sectors exposure (blue line). Galleon generated no alpha in the sectors selection (i.e. blue and red lines are together).
Figure 4           Galleon Alpha
In order to replicate the Galleon BUY and HOLD exposure, one should have had the following weights in the provided factors, since inception:
Figure 5           Galleon Buy and Hold Strategy
Pink: HFN Technology Index 35%
Brown: DJ technology Index 10%
Blue: CASAM Sector Technology Index 40%
Yellow: DJ US Small Caps -10%


Step 5: We computed the return differential between Galleon monthly returns and its BUY and HOLD weights (Figure 5). These returns are shown in Figure 6 and are alphas which  could be attributed to non-systematic factors such as stock selection, sector selection (but we saw that Galleon had no sector selection skills in Figure 4), skill, luck or… insider trading.
Figure 6 shows that July 2006, July 2007, July 2008 (cells in red) are three months with huge positive alphas. We remind you that Galleon is prosecuted to have done insider trading during July 2007 and July 2008 (see appendix).
Figure 6           Galleon Alpha


Source: United States Magistrate Judge, Southern District of New York, 15.10.09, related to July 2007 tip. Google lost 36USD on Friday 20.07.07 and Monday 23.07.07, 3 days after the short selling.

Source: United States Magistrate Judge, Southern District of New York, 15.10.09, related to July 2008 tip. Akaima Technologies lost 8USD the 31.07.08, 5 days after the short selling.