I'm a big fan of live exercises too, mainly because it's a great way to see how candidates think and how they collaborate with others. There are only a couple tradeoffs with this format (every approach has them): live exercises can be more stressful and teams with many applicants won't have the bandwidth to offer this to everyone who could be qualified.

My favorite is a combination: short (1 hr) take-home followed by live discussion/pairing with anyone who does a half-decent job. It reduces stress because candidates will already be familiar with the code (they wrote it!) while being efficient with time.