Northwater’s alpha-centric, open-architecture, solution-oriented business model: a harbinger of things to come?
Northwater Capital Management is so into alpha-centric investing, that until last year, its old company home page included only three things: the company’s name, its logo and the CAPM.
They have since opted for a more disarming view of the sunset over water (perhaps the fabled “north” water). But the alpha-centric heritage is alive and well according to a recent interview with Northwater president Paul Robson in a full-page P&I “Face to Face” interview. When asked by P&I’s Christine Williamson what the “next incarnation of portable alpha” will be, Robson shows how alpha-centric portfolio construction is essentially turning product manufacturers into de facto investment consultants:
“The next incarnation will involve aggregating risk on the total portfolio level so investors completely understand the types of market risks they are taking and the level of active risk they are taking. We have launched a new tool called Portfolio Platform that will help clients do this. As a first step in that incarnation, clients are sending us return data for all of their portfolios, not just what we manage. We don’t see the managers. They’re telling us to use the tools we’ve built to identify alpha generation in the hedge fund space to articulate the risk within the portfolio they’re trying to build. We can give them a snapshot of what their portfolio looks like on a risk basis, showing them where the correlations are, what risks they are taking and what risks they aren’t taking. Then we can come in with solutions to problems that are identified.
“The evolution of portable alpha will add the ability to take a holistic approach to analyzing a portfolio so you can understand the risk and then to focus on truly diversifying that portfolio with uncorrelated alpha sources.”
All Robson, all the time
No sooner had Alpha Male finished reading Robson’s manifesto in P&I when the March 1-7 issue of HFM Week hit my desk (two weeks late – so much for that stupid office distribution list). And who graces the cover of that venerable publication? M. Robson. With Northwater’s PR department apparently in full gallop, Robson tells HFM:
“The investors who are attracted to our way of doing things like the approach of separating alpha and beta – it’s very interesting to them.”
And of course, it’s very interesting to us at AllAboutAlpha. According to Robson, Northwater has been plugging Portable Alpha since 1998 and with 23 portable alpha mandates, is one of the most – if not the most – experienced firm in the portable alpha sector. He tells HFM that 90% of the firm’s $4.5 billion AUM is used in a portable alpha context.
HFM also discusses Northwater’s bring-your-own-alpha platform (“Portfolio Platform“), an offering we believe is notable as much for its portfolio construction approach as for its open-architecture. Allowing clients to bring other sources of alpha into Northwater’s portable alpha process further blurs the line between product manufacturing and investment consulting further.
On the future of alpha
According to HFM, Robson believes there is too much focus on “the issues of whether too much money is chasing too little alpha”. He continues by essentially rebuking “peak alpha” theory:
“Just as there are opportunities that exist today that didn’t exist five years ago, so there will be opportunities that exist in five years that don’t exist today…changes in the banking industry that led to inefficiencies for hedge funds to exploit are a prime example of why people should not get to worried about how much money is chasing hedge funds…there will be other structural changes…you simply need to be able to move your portfolio to where the alpha will be.”
Armed with a new investing paradigm, an open-architecture platform, and a solution-oriented sales pitch, Northwater has been attracting more and more attention recently. The fact that March has apparently been declared “Paul Robson Month” by the media can’t hurt either.
– Alpha Male