The Hunt for Genuine Alpha

Written by Amanda White. This article was originally published by Investment Magazine.

Anthony Todd, the chief executive of Aspect Capital, a systematic quantitative manager based in London, said there is alpha in the market, but the real challenge is to classify or define it.

“Alpha is return in excess of a benchmark, but how do you define that benchmark in alternative assets?” he asked, speaking in a session titled, ‘Alpha is not absolute: The commoditisation of alpha’. “Alpha exists but it is difficult to find.”

But AMP Capital head of alpha strategies, Alistair Rew, said alpha is no harder to find now than it was in the past.

“There never was a lot of it, there’s always been a little bit; we’ve just worked out how to better define it,” Rew said.

He said constraints on asset managers’ abilities to generate alpha should be considered by institutional investors.

“If you constrain talent, then you will constrain the ability to generate excess returns,” he said. “Part of the strategy is to un-constrain what is constrained today, to move away from benchmarks and low tracking error.”

But, he added, much of that is to do with organisational design.

“It is very expensive to consistently deliver alpha,” he said.

Alternative beta’s emergence

The panel also discussed the commoditisation of alpha and the advent of smart beta, or alternative beta.

Colonial First State senior investment manager Guneet Rana, who oversees the CBA-owned wealth manager’s alternatives portfolio, said she is a believer in alpha, and uses both alternative beta and alpha strategies in the portfolio.

“The objective of the alternative beta portfolio is the same as the overall fund,” Rana said. “I like the portfolio to achieve that objective, and the good part is I still believe in skill, so the rest of my portfolio after fees should outperform this.”

The head of JANA’s alternative investment research team, Courtney Wilder, said the asset consulting firm is of the view that alternative beta should not be called beta because active decisions are involved.

He does say, though, if a strategy is a scalable alternative then there should be some fee reduction in that. But he cautioned investors about being tempted to bring those strategies in house.

“With smart-beta products, if you don’t execute properly you will eat up all the alpha. It may be better to outsource,” Wilder said. “With smart beta versus active funds in the quant space, we ask, ‘Do you get a more robust solution by giving up 10 basis points?’ Then that’s the answer.”

After consultation with clients and consultants, Todd’s firm, Aspect Capital, decided not to enter the space of alternative beta.

“There are two different categories of investors looking to access medium-term trend-following strategies, some will pay a premium for our flagship fund, and there’s another distinct category of client who wants access to it but with low fees,” he said.

The firm launched a flat-fee fund, but Todd said no investor has yet left the flagship to go into the flat fee fund.

“Within the low-cost space, we are seeing a bifurcation between more premium offerings, with stronger content and refining models, and then the very low cost medium-term trend-following funds, which are static and rules based, and we think that’s a very risky proposition,” Todd said.

Part of the risk, he said, is the level of investment in research and development that is required in these strategies, creating a huge risk attached to rules-based approaches.

“Markets evolve over time,” he said. “The models we used 10 years ago were successful for the time, but if we used them today, we wouldn’t be successful. Ongoing investment in R&D is important, and the experience and expertise of the team is hugely important.”