Fundamentalism in Asset Management

Jan 17th, 2007 | Filed under: Academic Research, CAPM / Alpha Theory | By:
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Despite their “high-flyer” status, FT.com reported today that several high profile UK asset managers have recently begun bailing out of long-only shops.  Reasons ranged from retirement to “spending more time with family”.  But as this article points out, many have been wooed by hedge fund companies.  Says FT.com:

“Immediately after retiring from CSAM, (Bill) Mott (a star Credit Suisse fixed income manager) announced that he could not resist the lure of running money on a day-to-day basis in an environment unencumbered by bureaucracy. He is joining former colleagues to set up Psolve, an investment boutique, which he describes as a ‘dynamic and free-thinking environment where the fund management team’s interests can be aligned with those of both the group and our investors’.

“The lure of boutiques of specialist and hedge fund managers, which promise managers more freedom and higher pay linked to performance, is a sensitive issue for big investment groups.”

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  1. [...] Analytic Investors (see previous posting) calculates an “alpha” for NFL teams at the end of each season of American football.  They define this alpha as “the extent to which each team exceeded or underperformed its expectations”.  Essentially, they attempt to identify how well a team performed given the raw materials available to it.  While a comprehensive list of these raw materials isn’t listed anywhere, the “market” (i.e. bettors) collectively defines them via predicted margins of victory. Â We might refer to this alpha - this unexplainable quality – as “heart” or perhaps “skill” displayed by the head coach in making the most with what he was given. [...]

  2. [...] They provide three reasons why a hedge fund structure may be more conducive to alpha generation than a traditional long-only structure: protection of intellectual property (a.k.a. opacity), performance incentives (whose asymmetry, they say, can be mitigated through manager co-investment), and lack of constraints (a la Grinold’s “Fundamental Law of Active Management“).  [...]

  3. [...] SSgA isn’t just the latest 130/30 bandwagon-jumper.  Sean Flannery (right), CIO Americas at SSgA is obviously a disciple of Roger Clarke and Harindra de Silva – whose research extended the Fundamental Law of Active Management and paved the way for the 130/30 pitch.  [...]

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