Earlier today (Monday), I spoke with Jim Dunn, VP at Wilshire Associates about the firm’s new partnership with hedge fund manager Fairfield Greenwich Group to provide a turn-key portable alpha solution.
A former convertible arbitrage manager and graduate of Villanova University, Dunn was hired by Santa Monica-based Wilshire about 18 months ago to spearhead the firm’s move into hedge fund-related strategies. He says that Wilshire’s view of hedge funds has undergone a metamorphosis over the past two years as the firm looks for ways to marry passive and active management.
The new offering is based on Fairfield’s existing fund of funds program. He describes Wilshire’s value-add as a) selection of appropriate betas b) counter-party relationship management and c) fiduciary activities.
Wilshire uses its formidable experience with betas (e.g. the Wilshire 5000) to identify betas that might exist within the fund of funds. Then it identifies the most efficient way to strip these betas from the fund by entering into various swap agreements. Finally, Wilshire brings its fiduciary experience to bear in managing the overall program (e.g. cash management, ISDA covenants etc.)
When asked whether some betas might be left in the Fairfield fund of funds, rather than stripped out, Dunn said that Beta is a lot like cholesterol. You can have good beta and bad beta. But for now, he says, most betas are being removed from the portfolio, leaving mostly alpha.
How do clients know if the product is working? Simple, says Dunn: the offering aims to produce 400 bps of alpha vs. the 50-60 bps produced by traditional long-only mandates.
Dunn says Wilshire chose Fairfield for several reasons. Firstly, the firm shared Wilshire’s risk management culture. Second, the Fairfield fund of funds program was highly diversified. Third, the fund of funds had secured capacity with many of its underlying managers â€“ providing it with room to grow. And fourth, Fairfield (and the fund of funds itself) was able to assume the counterparty risk associated with the swaps used to manage beta exposures.
Dunn describes Wilshire’s and Fairfield’s competencies as complementary. For example, Fairfield has extensive international distribution relationships while Wilshire has traditionally focused on the US domestic market. In addition, Fairfield’s business has been built on identifying manager skill, while Wilshire’s philosophy can be described as more quantitative.
But while the Fairfield relationship is currently exclusive, Dunn is not ruling out other alpha providers down the road. He says that if a client wanted to bring its own alpha source, he is happy to oblige. He also sees the potential to mine alpha from Fairfield’s single manager funds in the future.
The offering is targeted at small and mid-tier defined benefit pension plans that don’t usually have the experience or balance sheets required to execute a portable alpha strategy. Dunn says the firm is also discussing the idea with several endowments, too.
After peppering Dunn with questions for about 15 minutes I concluded by thanking his Villanova Wildcats for knocking off Oklahoma last week, leaving Alpha Male’s alma mater, Duke, in sole possession of college basketball’s current record for the longest home non-conference winning streak. (With apologies to non-US readers who will surely view such a record is clearly grasping at straws.)
– Alpha Male