Triumph of the Nerds
Oct 8th, 2006 | Filed under: Institutional InvestingBy: Mark Veverka, Barron’s
Published: October 9, 2006
This article in Barron’s illustrates how the successful bifurcation of alpha and beta (and their re-combination in the form of alpha-centric investing strategies like portable alpha) leads to world domination in the money management business. Out of nowhere in the 90’s, Barclay’s Global Investors has launched not just a massive passive management (ETF) business, but has also laid on top of that a $350 billion-plus quantitative active management (read: hedge fund) business. BGI is now the second largest money manager on the planet (after UBS).
“Long revered in institutional circles for its brainy methodologies, BGI emerged as an innovator in index-investment strategies about 35 years ago. (Vanguard popularized them among individual investors.) Barclays now oversees more than $1 trillion in portfolios that use indexing as their key strategy.”
“Its active-management business, which is 100% quantitative and includes a highly lucrative hedge-fund operation, is a huge success. BGI is the largest risk-controlled active manager in the U.S., with $369 billion in assets.”
But like Citigroup (and potentially others), BGI may face challenges integrating the culture (and compensation schemes) of both passive and active (hedge) investing:
“With the success of the active-investment business, including its hedge-fund unit, comes friction that didn’t exist when the company was mostly an indexer. Former employees and competitors say that implementation of a stock-option compensation plan has stirred resentment in the ranks.”
“…a one-time employee, who is still in the industry, contends that the active part of the business has become the “tail wagging the dog.” But (Blake) Grossman (CEO) says: “There is no tail to wag. It’s all part of the same organism.”
Roger Ehrenberg, former head of Deutsche Bank’s $6 billion hedge fund group, commented recently on AllAboutAlpha.com that putting highly active management under the same roof as traditional or passive management can mean:
“…you may have an employee that makes many times more than the CEO of the whole institution. And that’s ok – that is if your culture can handle it and if you want to be successful. Otherwise, don’t play.”
So it looks like BGI has done something right here by simply holding the shop together.
Regardless of the cultural and operational challenges of integrating old and new, we at AllAboutAlpha.com hold that this two-pronged approach to money management is destined to become the model of the future. BGI is a harbinger of this revolution.
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