With its (appropriate) focus on generating returns, the asset management industry tends not to spend inordinate amounts of time on introspection – on the way firms in the industry management and organize themselves.  As management consults are fond of saying “form follows function”.  That’s consulting-speak for “structure follows strategy”.

A great example of an organization that realizes the holistic implications of alpha/beta separation is Sweden’s AP7, one of the country’s many so-called “buffer funds” designed to fund the retirements of its citizens.  Regular readers may recall AP7 and its forward-thinking CIO Richard Grottheim.  As we reported in January, AP7 has recently awarded what it calls “pure alpha briefs” that are essentially notional overlays applied to the fund’s passive portfolio.

A few weeks ago, Grottheim and colleagues including one from the Stockholm School of Economics, revealed how AP7 is set up to undertake this kind of innovation in a new white paper.  In this paper, Grottheim and friends propose an org. structure that they say shows “not only significant improvement in portfolio performance, but also a more transparent and cost efficient portfolio structure.”

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