BGI: Why Buy Pre-Packaged Alpha & Beta?
Jun 18th, 2007 | Filed under: Portable Alpha & Alpha/Beta SeparationOpalesque’s Matthias Knab reported from Hedge Fund Investments Japan IQ 2007 in Tokyo last week about comments from BGI’s Stan Beckers on alpha/beta bifurcation. His alpha-centric views echo those of his boss Blake Grossman (see related posting). Reports Knab:
“At a hedge fund conference in Tokyo this week, Stan Beckers, Managing Director and Head of Alpha Management Group at Barclays Global Investors, said the new 130/30 is a ‘first step leading to a decomposition of the current asset management practices.’ Even today, most alternative products would come as ‘pre-packaged combinations of beta and alpha. Why?’, he asked, should investors continue to purchase these products at inflated prices ‘when you can buy them separately’, he said in a session dedicated to Portable Alpha.”
When asked by Knab about the appropriate fee for true alpha, Becker’s provided a refreshingly frank answer:
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[…] When you think about, this makes a lot of sense.  Most costs (save performance fees) are unrelated to performance. They are essentially a guaranteed negative return with basically no volatility. If you removed the negative sign, it would be quite apparent that this return would be tantamount to (precious) alpha.  Our example from a few days ago of the hypothetical fund charging 2% in a year when gross returns amounted to 2%, clearly illustrates that fees basically net-out against alpha. The numbers may be small compared to overall returns, but are gigantic compared to the typical amount of alpha delivered. In other words, cutting fees amounts to a serious alpha ”gimme“. […]