By: Christina Grotheer, CFA Magazine
Published: September/October, 2006

“I think the last five years have resulted in an industry-wide bifurcation of alpha and beta.” 

        – Alexander Ineichen, Senior Investmet Officer, UBS Global Asset Management

Few would dispute that Alexander Ineichen is a titan of the hedge fund industry and a prophet of alpha-centric investing.  He was the author of UBS’s most re-printed research reports ever: “In Search of Alpha”, and “The Search for Alpha Continues”.  In fact, Alpha Male has a special shrine in his home dedicated to this original thinker.

In this article, he turns his attention toward “asymmetrical return profiles”, arguing that asymmetry, not absolute returns per se, is the hallmark of the new investing paradigm. 

Unfortunately, this article over-simplifies his position and draws on various stereo-types.  Notably, the author says that portable alpha and absolute return investors are simply ”caught up in the latest investment craze”, but then positions Ineichen’s ideas as a subset of absolute return investing itself.  Reminds Alpha Male of his brother’s recent shenanigans in Mongolia (read post).

While discussing relative vs. absolute return investment styles, Ineichen points out “the absurd situation where a relative return manager could lose 30 percent of capital but still have met his objective if the benchmark is down 35 percent”.  This is a popular line in hedge fund marketing circles to ridicule long-only managers.

But later in the article, Ineichen also says that, “If a pension fund invests in an equity long-only manager, the manager will not be able to hedge the whole equity exposure because that will change the whole asset allocation of the end investor.”

So who’s to blame in the much-invoked-by-marketers “absurd situation” where a long-only manager is a hero for losing less?  Note that Ineichen calls the situation absurd, not the long-only manager.  In other words, he suggests that the end investor’s policy mix is to blame, not the long-only manager.  Alpha Male would add that if anyone is to blame for the policy mix, it’s the investor’s consultant, not the long-only manager who is mandated to hug the index.

The bottom line very counter-intuitive, the future is relative, not absolute.  Although investors may eventually purchase alpha and beta separately, they will continue to re-compile them according to a long-biased policy mix.  Why?  Because investors are inherently relative animals – a topic for another post.

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