Beta max

Back from holiday and the markets are doing little of note. My emails unread total 612. Most seem to be from people offering meetings, which I don’t want. But some are interesting. For example:

To: Pieter Mullen, From: Hector Schloss-Schlusser, Date: 24 July, Time: 16.42, Subject: Beta is just old alpha commoditised. Proposed Meeting 27 August.

You see, with subject headers like that, you do take a look. And then you take the follow-up call and before you can say ‘nee dank u’, it is 27 August and you are looking at Hector with the round spectacles and a face that radiates good will and bonhomie.
So I tell Hector we are happy with our managers and are not looking to appoint new ones. He says that’s fine, adding: ‘I am just here to talk about efficiency and why you are paying far too much for the hedge fund exposure you have.’ Obviously I have a pension fund board that tells me that, but that is another story.

So Hector gives me his pitch. Managers are very unlikely to provide true alpha consistently. Therefore, investors might just get the risk premium, in which case, why not access this more efficiently? ‘Aha,’ I say to myself, I am talking to a hedge fund replicator. (We get many of those at Wasserdicht Pensioenfonds.) But Hector continues: ‘And we are not hedge fund replicators, we provide exposure to hedge fund beta. This is different. We think the replicators often offer exposure to traditional beta.’

And now I start thinking about our regulators and board members. Would hedge fund exposures be more acceptable if we talked about accessing beta? Beta gives the impression of safe and fuzzy indexation at a couple of basis points, so perhaps there is a chance.

So I talk to Mr Geenidee, member of the regulatory team. ‘I think this could be an appropriate way of accessing hedge fund risk exposures but at a lower price.’ ‘But it is still a hedge fund, and probably listed in the Caymans and certainly something none of us could understand.’ ‘I think you should meet Hector.’

And Hector does visit us again, sooner than he might have hoped. Geenidee and Schloss-Schlusser shake hands and debate the points. ‘Look’, sighs Hector, ‘the Wasserdicht fund wants performance that is positive, and uncorrelated with other parts of the portfolio. Correct?’ Geenidee moves his head, which Hector takes as a nod. ‘You can get this from alpha that is uncorrelated with other risk exposures, or from beta not already in the portfolio, perhaps high yield, or lastly from hedge fund beta’. ‘I see.’ I decide to help Hector. ‘We see the benefits. But how easy is it to get this beta? How do you do it?’ Geenidee interrupts: ‘If you are saying that alpha becomes beta over time, then perhaps we should also be looking at old betas that may become new alphas?’ Hector smiles as he moves to the door. ‘Such as a tulip?’

Pieter Mullen is investment director at Wasserdicht Pension Funds


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