Engineering an Alpha Engine
Nov 7th, 2006 | Filed under: Institutional InvestingBy: Lee Thomas, Allianz Dresdner Asset Management
Published: Winter 2005, Journal of Investing
It seems the money management industry is coming around to understanding something venture capitalists figured out many years ago: that it’s better to make a large number of bets on separate businesses than it is to put your eggs in one basket – even if you believe your ability to identify winners is without compare.
Lee Thomas proposes what amounts to a technology incubator as the ideal model for the asset management business. Remember the incubators? Part VC, part landlord, part mini-conglomerate. Thomas calls his investment management incarnation an alpha engine.
Firstly, he explains why alpha matters again:
During the boom we could all but ignore alpha, those extra few percentage points above the market return that active managers claimed they could deliver. When market indexes were producing double-digit returns, alpha seemed irrelevant. Now, with market returns to passive stock and bond investments reverting to their norms, alpha matters again.
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[…] In this comprehensive defense of the hedge fund industry, Washington Post columnist Sebastian Mallaby echoes a theme that has weaved its way through stories several times on this blog: the parallels between technological innovation and financial innovation, between e-business start-ups and hedge fund start-ups, and between economic efficiencies resulting from process disintermediation and financial efficiencies resulting from the disintermediation of securities (such as mutual funds). […]
[…] Almost concurrently, Thomas (whose article “Engineering an Alpha Engine” is in the Hall of Fame) wrote about an “alpha-centric” approach to investing in the September/October 2005 edition of the CFA Magazine.  […]