Mostly… fixed income and cross product eTrading

March 25, 2007

Separating Alpha and Beta

Filed under: 2015 — holky @ 6:33 pm

On the theme of separating alpha and beta returns (re IBM paper in my original 2015 post) EFN article was drilling down into how investors are working out how to separate out the “alternative betas” away from hedge funds (and so avoid the “two and 20” hedge fund fees on these beta returns) and instead slot them into their portfolios to sit alongside the passive equity and bond funds they have had for years.  One example of the off-piste investments being made is with asset manager Orthogonal Partners who are targeting small investments that have few participants and almost no performance record; such as weather derivatives, emissions certificates, insurance write-offs, distressed power stations and equity in football players.

The biggest challenge in alternative beta remains capacity. An influx of capital tapping into such small markets and illiquid investments could hit returns. Mr Cutler (from BGI) said: “Capacity is a problem, but then capacity is a problem for everything.  In an active fund it is a problem but it is a manager-by-manager issue for alternative betas it is more about the markets. If there is a lot of demand for high-yield bonds, the spreads will narrow. This is part of the reason that the asset allocation is so crucial.  “Mr Beenen (from PGGM) agreed capacity was a difficulty, but said the demand for alternative betas would create supply. He said: “You can create capacity through the securitisation of new risks. Only a tiny fraction of the risks out there are available in a form that can be traded on the stock exchanges.”

I wonder how much this tells us about the shape of the future in terms of customer/provider etrading landscape. I dont recall seeing specific plans from any of the existing platforms with regard to expanding their etrading functionality to anything more flamboyant than finally nailing IRS, then CDS, and that’s about it.  So realistically the venue for etrading anything slightly off-piste is either a) one of the new platforms (websites) coming to market specifically for trading these types of investments?, or b) the customer-side desktop, liquidity taker runs their own system with connectivity into the market (wherever and whatever that may be).    If it’s b) then why would that customer then want to use a separate platform for their ‘traditional’ order flow?


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