George Main is one such manager. Fiercely Canadian, he laments the fact that he has rarely made any allocations to Canadian hedge fund managers out of his nearly $2 billion fund of hedge funds at Diversified Global Asset Management (DGAM).
Some of you might recognize George’s name from his recent stint as one of the speakers at GAIM USA in Florida last winter. Main is due to keynote Friday’s “HFM Live Canada” agenda with an address on alternative beta.
His approach to investing is somewhat unique. Most hedge fund investors will begin with the decision to invest in a single manager or a fund of funds. Once this critical first step has been taken, the investor will usually select a suite of hedge fund strategies in which to invest. After this, they will seek out the best managers within each hedge fund strategy. When they have selected appropriate managers, they will typically inquire about their edge â€“ the fundamental economic engine of their out performance.
Main’s DGAM turns this process on its head. They begin by identifying the fundamental economic engine behind hedge fund returns (alternative betas). Then he determines if those economic engines can be accessed by DGAM’s proprietary trading platform. If so, he will exploit those returns via internal trading. If not, he will seek an outside manager to exploit the opportunities. Only then will he find an appropriate manager. Explains Main, So much of hedge fund returns come from the strategy itself, not from the manager per se.
He sees hedge funds as filling a niche not unlike any other business, rather than simply speculating on the future direction of security prices. According to Main, hedge funds transfer risk, make markets, and provide much-needed services to businesses in the real economy. One example of this is the role that hedge funds might play in taking the other side of trades established by airlines to hedge their fuel requirements.
In a sense, Main is a financial entrepreneur, constantly seeking ways to fill open niches. As such, he takes his cue from traditional business strategy models such as Michael Porter’s 5 Forces model. And as the competitive advantages explained by Porter’s model can deteriorate over time, so can the ability for an alternative strategy to produce alpha. (Importantly, however, Main believes that new sources are always coming on line to replace these depleted strategies.) This broad concept is often used to explain the macro-economic role of hedge funds in general. But it is less often used as the basis of an actual trading and investing strategy.
The result? A highly diversified pool of alternative betas. The actual manager selected to extract the alternative beta is secondary to the identification of the beta itself.
To summarize his approach and corroborate his thinking, Main cites a quote from an interview conducted by AllAboutAlpha.com with Professor Thomas Schneeweis of the University if Massachusetts a few months ago:
“(Is Alpha finite?) It depends on how you define alpha. If alpha is generated by some wizard who wakes up in the morning and has the unique ability to give you a return absent of any risk, then that probably never existed. But if you are talking about an individual who is able to add together a unique set of risk opportunities that aren’t easily accessible via other sorts of vehicles – then that alpha does exist.