Hedge fund beta and plain vanilla beta strategies are looking good right now – those institutional investors prepared to allocate any money away from cash do not look likely to want to pay for skill for a while.
Listed markets, first down and now down so far, are expected to attract the bulk of the early money when funds rebalance or, maybe, implement new asset allocation strategies.
According to Alistair Lowe, chief investment officer, global asset allocation and currency, for State Street Global Advisors, people will re-evaluate illiquid investments in the current environment: “People have been paying 2 and 20 for what?” he said on a trip to Australia last week. “A lot of active managers have struggled. This will cause a lot of soul searching among investors. Hedge fund beta strategies … and equity index funds are generating more and more interest.”
Hedge fund beta strategies involve the systematic exploitation of factors such as style or capitalisation. They are sometimes referred to as ‘beta prime’ and investors are increasingly unwilling to pay active fees for such returns.
(Some other people refer to hedge fund and hedge funds of funds replication strategies as hedge fund beta but such a descriptor seems to be on the wane.)
With markets off 30-40 per cent around the world, so the thinking goes, rebounds in whatever market (beta) will swamp returns from alpha-generation through stock picking. And investors don’t need to pay the stereotypical 2 per cent base and 20 per cent performance fee for alternative management to get the beta.
Lowe, who describes himself as “a cautious optimist” and probably among a minority of funds managers with similar views, believes that markets have priced in an event almost as severe as the Great Depression.
“Earnings would have to decline another 50 per cent to justify the current prices,” he said. “But most strategists are forecasting a decline of about 10 per cent.”
The three main differences between countering the current crisis and that around the Great Depression, he said, were: a larger and more balanced government system today; automatic stabilizers such as welfare and other fiscal stimuli today; and the acceptance of global trade today versus a protectionist set of policies in the 1930s.
Within various sectors, Lowe favours the US over non-US equities on a “first-in-first-out” theory, a continued strengthening of the US dollar versus the euro as policy rates start to adjust in Europe, emerging markets “as attractive, moving towards more attractive”, with particular value in some Asian countries rather than the Middle East or Africa, and large caps over small caps.