Movie Stars, Super Models, and Alternative Beta
Feb 12th, 2007 | Filed under: Alternative Beta & Hedge Fund ReplicationThe worlds of filmmaking, fashion and finance converge on London this week. Dame Helen Mirren was crowned queen of the world at last night’s BAFTA awards (Britain’s Oscars), London Fashion Week has flooded this city with (highly controversial) size-zero models, and Professor Bill Fung presides over IRC’s Hedge Fund Replication and Alternative Beta conference today. Only able to attend one of these three events, Alpha Male eschewed the movie stars and super models and chose instead to spend the week with hedge fund stars such as Fung, David Hsieh, and Lars Jaeger. And while there were no catwalks or super models, we did enjoy plenty of super factor models.
While this event is ostensibly about hedge fund replication, it really speaks to alpha-centric in all its forms. Fung, who coined the term “alternative beta” in a chapter of a 2003 book edited by Lars Jaeger, kicked off the day by asking the audience, Why pay 2 and 20 fees for what you can do yourself? Whether it is possible to “do it yourself” remains to be seen. But regardless, this is the central question in alpha-centric investing today.
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[…] We agree with this observation.  After all, a lower cost structure (assuming for a moment that replication works), is no reason to set a low price. When was the last time a money manager said “Oh. Okay. I’ll drop my management fees now that Bloomberg has given me sweetheart a deal on those terminals.”? In a posting on February 12, we wrote: “… the assumption that replicated hedge funds will necessarily be cheaper than real hedge funds is based on the assumption that traditional hedge funds price their services based on their costs. But the high profits earned by hedge fund managers and the extreme scalability of their business models clearly shows that hedge fund fees are currently based on their value to investors, not their underlying costs. So why would these new players want to set bargain prices for their services?” […]
[…] The early spin deserves both laurels and darts.  Deutsche Bank deserves kudos for addressing a common concern about hedge fund replication offerings - that they only attempt to replicate hedge fund returns after fees. There are those who feel that this might be okay if those suppliers didn’t also attack hedge funds for charging too much. After a landmark event on hedge fund replication in London last winter, one reader wrote us to express several concerns. One of those concerns read as follows: “Just what is being replicated? My understanding…is that (hedge fund replicators) are modeling HF returns net of fees. The utility to the end investor will be the same as if they were paying large fees to a hedge fund manager. The saving on fees does not lead to higher returns to the investor. This has been conveniently overlooked.” […]