Relative Event Long/ Tactical Equal     Value Driven Short Trading Risk S8tP 500 Relative Value 1.00           Event Driven 0.64 1.00         Long/Short 0.36 0.66 1.00       Tactical Trading 0.16 0.08 0.23 1.00     Equal Risk 0.66 0.73 0.75 0.67 1.00   SScP500 0.29 0.58 0.61 0.04 0.48 1.00 Beta 0.06 0.24 0.46 0.03 0.15 1.00 Mean 6.2% 6.9% 8.7% 7.0% 7.0% 7.5% Standard deviation 3.2% 6.4% 11.8% 9.9% 4.8% 15.6% Sharpe ratio 1.97 1.09 0.73 0.71 1.46 0.48 Data sources: Data are CSFB/Tremont indexes. The Relative Value index combines the CSFB/ Tremont Convertible Arbitrage, Equity Market Neutral, and Fixed Income Arbitrage indexes in a 40%, 40%, and 20% weighting, respectively. between the event-driven and tactical trading strategies to a high of 0.66 between the equity long/short and event-driven sectors. Further, correlations between strategies, as presented in Table 27.2, are also potentially modest. Using three strategies within the relative value sector, correlations range from 0.07 to 0.58. The indexes on which these returns are based have very short histories compared to comparable indexes for equity and fixed income investments. Decisions will likely need to be based on a combination of historical data and judgment to arrive at allocations to the various hedge fund sectors. Tactical overweights and underweights to strategies and sectors are also possible, and are a potential source of value added. Views on strategies and sectors can be derived from bottom-up analysis, studying the return potential of individual managers, or from a top-down perspective, by understanding the effects on expected returns of macroeconomic, financial, and supply and demand conditions. The ability to add value from tactical allocations is impeded by fund illiquidity, which imposes potentially long horizons on any positions taken. If the view is indeed expected to play out over a long period, or if the investor can plan to have TABLE 27.2 Correlations between Relative Value Strategies, January 1994 to July 2002 Convertible Equity Market Fixed Income Arbitrage Neutral Arbitrage Convertible Arbitrage 1.00 Equity Market Neutral 0.34 1.00 Fixed Income Arbitrage 0.58 0.07 1.00 Source: Tremont Advisers, Inc.