Thomas Friedman on alpha/beta separation

Watson Wyatt consultant Janet Rabovsky passes along an interesting observation from a recent Watson Wyatt global “research summit”, a biannual affair for those involved with manager research at the firm.  

Apparently, Thomas Friedman’s seminal book “The World is Flat” has a lot to say about the current state of asset management.  Writes Rabovsky:   

“…Another key theme of Friedman’s book is the separation of value-adding activities from commoditized activities. He says: ‘more and more jobs will be broken apart, with the more sophisticated tasks being done in the developed world and the less sophisticated tasks being done in the developing world—where each has its comparative advantage.’ Many companies have already embarked along this path, including my own. Research is done in Uruguay and Bangalore (for North America and Asia respectively), while data processing is done in the Philippines and Mexico City.

“A more interesting interpretation for the investment community, though, is the way this can be applied to investment management. Friedman is also speaking here about the separation of alpha and beta, though I am sure this was not his intent when he penned his ideas. According to Friedman, index exposure should be accessed cheaply, while active skill or alpha is value adding and can easily be separated from such a ‘commoditized’ activity as beta management. As we all know, beta can be accessed quite cheaply through index-tracking ETFs and passive management strategies. I am not sure that alpha is easily separated from beta, but I think we would all agree that it is worth paying for when found.”

This is a stellar example of how the pressures and changes facing asset management today follow a path – a sort of evolutionary archetype – that has been well travelled by other industries and, it appears, by the global economy itself.

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