Exotic beta is the new alpha
GLOBAL - The quest for alpha is increasingly being replaced by a search for exotic beta as pension funds are losing faith in managers' abilities to really outperform markets.
Delegates at the Opal Institutional Investors' Congress in Vienna named wrong price-return ratio and limited space in which to find alpha as the two main reasons for not relying on manager skill alone.
"At the moment a lot of money is still going into alpha but that will change as a lot of alpha is revealed as beta," noted Georg Schuh, chief investment officer of Deutsche Asset Management and head of the bank's €6bn pension fund.
"Real alpha, real skill is an extremely scarce commodity," said Giles Drury, senior manager at advisory firm KPMG.
Therefore, managers with real skill "can charge more as more people as they can take on want to invest in them", he added.
"Real alpha - if you can find it - only brings you low returns unless you accept a very high tail-risk," explained Bernhard Füreder, head of fund of fund services at the Austrian SMN Investment Services specialised in alternatives.
"A 5% annual return only out of alpha is very rare therefore we aim for a dynamic allocation to different betas with a little bit of alpha added."
Herwig Kinzler, head of Mercer Investment Consulting Germany, also sees a time problem for regulated institutional investors in the quest for alpha: "We might have to accept due diligence meas we are too slow to get into those investments. For unregulated businesses, like family offices, access is easier."
Schuh agrees but sees a general time issue in identifying alpha: "To really be sure whether a manager can produce alpha it needs four to seven years of research. By then this individual might have changed companies or investment areas."
"At the moment a lot of money is still going into alpha but it will decrease and people will pay more for beta as new products develop," he is convinced.
He added "alpha works in semi-efficient environments but there is not enough mispricing to accomodate all those searching for alpha" especially with over 30,000 hedge funds in the market.
"The emergence of index-tracking products helped to expose managers taking risks which can easily be replicated and left those with real skill," noted Drury.
Schuh noted his fund relied on exotic beta such as emerging market bonds or using fixed-income and equity products to track an index which looks at changes in the interest rate vs the stock markets.
"We focus on beta because it allows us to track our strategic asset allocation," said Philippe Aurain, head of external asset management at €34bn French reserve fund FRR.
"Alpha is used to optimise our performance but we only look at non-replicable alpha as we do not want to pay for systematic bias."
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