It’s a simple idea, but devastatingly attractive: alpha/beta clarity will surely come when we let traditional asset managers track indices, on the cheap, and let the hedge industry get on with the the job of actively managing assets.
Bin old style “long-only active management” and we can all get on with our lives, secure in the knowledge of what’s alpha, what’s beta, and how much they are likely to cost.
That (hopefully) is a crunch summary of a thoughtful piece in the most recent edition of the Citigroup Alternative Investments Journal, a full copy of which is available here via Opalesque (if you are a subscriber).
But let’s briefly run through the thoughts of Neil Brown, Citigroup Alternative Investments MD, and his top researcher, Rui de Figueiredo.
- The hedge fund “industry” is not really an industry at all. Instead, hedge funds simply represent a particular business model and governance structure within the broader active management industry. So questions about capacity and the like need to be examined in this larger context. When you do that it is difficult to find any problems.
- Asset management is experiencing an unbundling of value-producing services and is creating more choice for investors. In short, we are seeing the emergence of separate delivery mechanisms for alpha and beta — and it’s pretty clear that hedge funds, unlike traditional long-only funds, are more focused on the delivery of alpha.
- In the active management industry (long-only as well as hedge) competition has developed over what approach offers the best governance and structure.
Unsurprisingly perhaps, given that this report comes courtesy of Citigroup’s alternative management division, the authors conclude on this latter point that the hedge fund structure, although imperfect, is ultimately better suited. Providing beta returns is a commodity affair, while providing alpha is anything but — even if the costs associated with supplying the latter remain opaque and volatile.So half-way houses are out. Index-huggers are clearly a thing of the past.
