With the ink still wet on UBS’s agreement to manage a 130/30 fund for Canadian retail investors (see related posting), Deutsche Bank is now pitching its institutional “portable alpha” strategy to the US mass market.
The fund is called DWS Alternative Allocation Plus and according to the DB’s press release, it will use the firm’s year-old “iGAP” strategy (“Integrated Global Alpha Platform”). The iGAP has so far been offered only to institutional investors (see press release announcing that fund’s launch back in 2006).
We put portable alpha in quotations since we’re still not clear whether this fund really involves porting alpha – the refining, manipulating, or recompiling alpha and beta. According to DB, the fund is a simple fund-of-funds that may also include “other derivative instruments”.
Doug Beck, Head of Product Management at DB’s DWS Scudder unit, says:
“This fund is designed to be a simple solution that gives the average mutual fund investor access to components of what we believe are some of the best alternative ideas.”
While such a fund of hedge funds is an ideal component of a portable alpha strategy, on its own it does not constitute “portable alpha”. Portable alpha, after all, involves the separation of alpha returns from one beta source so that it may be notionally “ported” onto another beta source.
If the “other derivative instruments” in this fund were, say, futures or swaps with a notional value of 100% market exposure, then it could appropriately lay claim to the “portable alpha” moniker (like the “bundled portable alpha” approach advocated by Man Investments (see related posting) and others such as Diversified Global Asset Management and Bridgewater (see related posting)).
However, DB clearly states that the new fund is “largely uncorrelated to the core US equity and bond markets“. So it should not be confused with these other true portable alpha solutions.
Why all the interest in taking these “hedge fund light” products to the masses right now? HedgeWorld’s Chidem Kurdas may have it right when she suggested that their launch may be, in part, a response to recent market calamity. Says Kurdas:
“These retail products offer the wherewithal to make above-market, or alpha, returns, investing in alternatives like commodities which have done well in the recent mortgage-related credit shock and equity market volatility.”
Developments like this illustrate a secular shift away from high-beta mutual funds and toward bifurcated combinations of (commoditized) ETFs and (high-alpha-content) funds like this one from DB. Perhaps the sub-prime fiasco and the resulting “colossal recession” that some pundits have forecast will someday be cited as a major contributor to the rise of alpha-centric retail products among the masses. Call it the folly of the mutual fund industry’s implicit adherence to a doctrine of “mutually assured destruction” whenever markets falter.