By: Alpha Male

Alpha Male’s global-explorer brother recently returned from a trekking expedition in northern Mongolia.  On his first night in that nation’s capital, Ulaanbaatar, he got into an argument with his cab driver about the fare from airport.  Thankfully, a man dressed as a high-ranking member of Mongolia’s military stepped into ”assist” with the disagreement.  He managed to talk the cabbie down and brokered a peace deal between my brother and his chauffeur.

The episode seemed to have concluded as my brother checked into his hotel.  However, the Mongolian “military officer” had followed him into the lobby, was chatting with the hotel owner.  He followed my brother upstairs to his room proposing that he provide “help” to my brother in exchange for more of his coveted US dollars.

Any of you who have traveled in the developing world know the con: Tourist gets into trouble with locals, is ”rescued” by a passer-by, and falls prey to their rescuer’s own agenda.

This strategy is also used in the marketing of investment services.  Often it is far more subtle.  But occasionally, as Credit Suisse illustrates to us below, it can be quite transparent….

Firstly, let me say that I agree with Credit Suisse’s facts and many of its conclusions.  What I disagree with is the spin they have put on these conclusions that vilifies portable alpha advocates and positions Credit Suisse as the arbitrar of prudent investing…

Since institutional investors have a fiduciary responsibility, they tend to be a conservative lot.  And if there is one tried and true business to business marketing strategy for a conservative buyer it’s using skepticism.  By questioning the emergence of a new investment paradigm (portable alpha) and branding it “evolutionary”, not revolutionary, Credit Suisse Asset Managemet has played the skeptism card like a master, simultaneously positioning itself as both a trusted advisor and a full participant in the portable alpha revolution.

In a November 2005 letter, CSAM first argues that portable alpha is overhyped.

“The phrase “paradigm shift” is blatant marketing-speak. So when it’s associated with another recent buzzword, “portable alpha”, the conjunction is liable to provoke as much confusion as scepticism. What is alpha and is it really that easily moved about? And does “alpha transfer” represent so fundamental a shift in the industry that it could replace, say, the Capital Asset Pricing Model as the basis for asset allocation the way the sun replaced the earth at the centre of our solar system?  In our view, the emergence of the notion and practice of portable alpha is more evolutionary than revolutionary…”"For over three decades the foundation of institutional investment management has been the strategic asset allocation…policy allocations often result in high active management fees for returns on a par with passive index funds.”

But then, aware of their own commercial interests in this revolution, CSAM argues that portable alpha does build upon revoutionary concepts:

“Arguably the most powerful influence on the investment management industry over the past twenty years has been the application of financial engineering techniques that seek to enhance portfolio return and reduce risk. One clear expression of that trend was the development and growth of derivatives, which offered a means of efficiently replicating (or “equitising”) an index benchmark, creating “synthetic” and low cost exposure to just about any asset class.”

It goes on to juxtapose portable alpha against traditional strategic asset allocation:

“Traditional Benchmark Pie Leaves Investors Hungry…For over three decades the foundation of institutional investment management has been the strategic asset allocation…”

It even points to the recent explosion of the hedge fund industry as a key enabler for the growth in portable alpha.

“The last ten years have witnessed the creation of a veritable “alpha” industry. Along with the rapid growth of hedge funds (now over 8,000 in number and with over $1 trillion in assets), there is booming interest in asset classes thought to be less efficient (including commodities and currencies) and investment approaches less common (such as Tactical Asset Allocation and overlay strategies).”

CSAM concludes by calling portable alpha a new “paradigm” that addresses “inherent constraints in traditonal investment management.”

This debate is about semantics, and has no impact on the growing imortance of portable alpha and related startegies.  After crying foul over the hype surrounding portable alpha, CSAM seems as if they are fully on-board with this new paradigm after all.

The message to instititional investors: beware of the Mongolian military officer whose poses as a skeptic and proports to rescue you from swindlers.

- Alpha Male

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