Alternative beta like the early days of internet

The rise and development of alternative beta strategies are reminiscent of the early days of the internet, Philippe Jordan, president of Capital Fund Management told delegates at the Absolute Returns Conference.

Investment banks, large institutional fund managers, hedge funds and consultants are all competing to offer such strategies which rely on the use of algorithms to identify opportunities in momentum, value or carry driven strategies.

Jordan said at this early stage of development it was difficult to surmise which actors had the odds on their side, but pointed out many hedge funds already had the infrastructure built to exploit such strategies, so were well-placed to win.

Robert Graham-Smith, investment strategist of portfolio plus at Perpetual, agreed with Jordan’s assessment saying that it was at juvenile stage of development, with a huge diversity in how strategies were executed.

“A lot of these strategies make intuitive sense, but at some stage something will happen – a market event – that will cause a shakeout and prove one way or another if a certain approach works better in a certain situation,” he said.

He added that for researchers that was part of the challenge.

“In this space there is no track record. You can do fundamental research on a manager, their approach and risk management, but getting comfortable with expected behaviour of these strategies in a crisis environment is tough.”

Jordan analysis of his competitors and peers who ran standalone or multi-strategy approaches was that each ran a wide range of approaches

“When you look at the correlations between all these portfolios it’s very low. And that’s very interesting because this indicates signal is less important than methodology,” he said. “The decorrelation is coming from methodology.”

As the market matures, he predicted people will focus increasingly more on methodology, as opposed to signal, in order to differentiate manager A from manager B.

“Intuitively we think if they are long-term trend following they’re all going to be correlated at 95. I’m betting that won’t be the case.”

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