Day one of this event focused on portable alpha, while day two (Thursday) will focus on 130/30. Trying to draw a link between the two days has been left up to Alpha Male as moderator of a panel called “A side by side look at portable alpha and short extension strategies”. Wish me luck.
Blazing a trail for me today were several regular portable alpha commentators including the following…
Yoshiki Ohmura, head of portable alpha strategies at GAM, told the crowd here that portable alpha strategies don’t actually overlay alpha onto beta, but overlay beta onto an alpha source. While it may sound pedantic, this interpretation supports the view that portable alpha is as much about betas as it is about alphas (as discussed above). In addition, he said that alpha often contains extranious betas (what other, more saucy commentators have called dirty beta).
Man Investments’ Angelo Calvello led an interesting panel on whether portable alpha had lived up to the hype. A fierce advocate of alpha-centric investing, Calvello argued that portable alpha is anything but a fad. While bristling at the term paradigm shift, he did pronounce to the audience that shift happens!.
Other insightful Calvello-isms included:
- On the fundamental impact of alpha/beta separation: “Portable alpha is more than a strategy, it’s a world view. It impacts the way we build and manage our businesses, the way we build products and the way we hire people.”
- On 130/30: “130/30 is entirely sub-optimal and one that people use because of behavioral biases.”
- On the scarcity of talent: “You’re not going to find great alpha producers on Monster.com.”
- On alternative betas: The best analogy is what Craig Ventnor [whose company, Celera, cracked the human genome] is doing on the human genome project. The risk factors that drive returns are like chromosomes.
Harvard Business School’s Randy Cohen provided a sanity-check on common claims made by active managers (particularly hedge fund managers). As regular readers may recall, Cohen’s research suggests that hedge fund fees may be high â€“ but long-only fees are even higher when you compare alphas to alphas (see related posting).
Apparently not content to blindingly accept conventional wisdom, Cohen questioned one of the cherished beliefs of any efficient markets advocate â€“ that active managers under-perform the market. He asks if it’s really true that we take the top talent in the world, train them at the best schools and give them huge incentive yet they can’t do any better than a monkey throwing darts at the stock pages of the Wall Street Journal.
In answering his own question, he went on to say that while it is true that actively-managed funds fail to beat the market over the long term, this was a result of institutional factors, not a lack of manager-skill. In other words, when you add back trading costs, fees and cash drag, active managers actually beat the market by a couple of percent a year.
Thumbing his nose at conventional wisdom yet again, Cohen proposed that the commonly-held belief that managers are not persistent may actually be a result of using the wrong benchmarks and not of inconsistent skill.
With tongue in cheek, Cohen proposed to the audience that we all start a new private equity fund that actually invested in a leveraged S&P500 position. After 10 years, Cohen said we’d most likely be up about 30-fold and be branded as investing heroes. What investors would not know, however, is that we actually went to the beach for 10 years. They would erroneously use a private equity benchmark, when a (levered) public equity benchmark is more appropriate.
Finally, one panelist clarified for us a conundrum we raised a couple of days ago about active indexes (see related posting) Under his breath, he told the audience that the term index was often used to placate the rigorous demand of institutional investing parameters. Apparently many investors are unable to allocate capital to a fund of hedge funds, but are allowed to invest in an index even if that index is actually a fund of funds.