Portable alpha – Rise of the machine
Oct 17th, 2006 | Filed under: Portable Alpha & Alpha/Beta SeparationBy: Gareth Gore, Risk Magazine
Published: October 2006
A hat tip goes out to the Kirk Report for identifying this article. Apparently, the quant jocks at Risk Magazine have taken an interest in portable alpha not so much because of the flexibility of dividing alpha and beta, but because some newer versions of the venerable strategy involve highly quantitative algorithmic investing techniques.
I’m sure traders might take issue with this piece, but it does speak to the constant commoditization of “talent”, a topic recently covered at AllAboutAlpha (see posting):
“Man versus machine is slowly becoming a reality in the market-place, with strategies that once were the trademark of only the most experienced traders now being replicated by computers – cheaper, quicker and, so its advocates say, more reliably.”
In addition, Risk Magazine suggests that a wide range of individual strategies could be plugged-and-played by investors themselves. This is somewhat similar to the concept of “financial genomics” (see posting) and also harkens back to Business Week’s “How to Build Your Own Hedge Fund” last winter (see posting).
“Dealers say the development of a whole range of strategies built around all the major asset classes could in future allow investors to piece together their own pseudo-hedge fund.”
But hedge fund managers won’t like this bit:
“Banks charge a flat annual fee of around 50 basis points for algorithm-based products compared with more than 200bp for most hedge funds.”
“When you have 6-10% performance targets, how can you justify charging 2% against this set of strategies?” says Laurent Seyer, Paris-based chief executive of Societe Generale Corporate and Investment Banking’s asset management arm, Lyxor. “These days are over and there is going to be much more pressure on the fees and the margins. The pressure is already there from the market and from the performances, and we are only going to add to that with these structured products that are cheap, transparent and liquid.”
Like those of Dimensional Fund Advisors and their competitors, these products are a sort of “active passive” offering. As Dexit Joshi, managing director and head of equity derivatives at Barclays Capital in London tells Risk Magazine:
“This is certainly one of the newer products we have on our books. It fills a gap between active asset management and investing in indexes.”
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[...] Okay, maybe not the whole Earth, but a serious chunk of it. Why? Because passive alternatives will begin to crowd out new entrants – just like they did in the mutual fund industry. Like the quants at Barclays, JP Morgan and SocGen, the authors of this report espouse a new form of quasi-active hedge fund than produces exotic beta at fees above pure passive management (e.g. an ETF) but below pure active (hedge) funds: “…it may be increasingly difficult for investors to justify paying hedge fund fees for the performance of the average active manager. Passive alternatives to active hedge funds represent a natural evolution in an increasingly mature industry.” [...]
[...] Portable alpha – Rise of the machine By: Gareth Gore, Risk MagazinePublished: October 2006A hat tip goes out to the Kirk Report for identifying this article.? Apparently, the quant jocks at Risk Magazine have taken an interest in portable alpha not so much because of the flexibility of?dividing alpha and beta, but because some newer versions of the venerable strategy involve highly [.] (more) [...]