bfinance, the UK-based manager search and consulting business which set up shop in Australia this year, has proposed a redefinition of the alternative beta market, which it says has expanded by 30 per cent in just the past nine months.
bfinance, which provides a different business model to that of the mainstream asset consultants whereby it is paid by the managers rather than the super funds, has proposed to split the universe into “broad spectrum” asset managers, consisting of about two-thirds, and hedge fund managers, consisting of the other third, which have increasingly launched alternative beta products alongside their existing funds.
In a new paper, ‘The Changing World of Alternative Beta’, the firm says that both the prices being charged and the performance characteristics of apparently similar strategies in the alternative beta, risk premia, smart beta, factor-investing space vary considerably between providers.
According to Kathryn Saklatvala, global content director and the report’s co-author: “When it comes to implementing an alternative beta allocation, there are big differences between theory and practice. Execution differences, asset-driven erosion of risk premia, [the] fit with the existing portfolio and hidden costs are only a few of the obstacles that investors must navigate in an increasingly broad and complex sector…
“Investors should also be aware that one size does not fit all and with diversification being the primary objective, the construction of an appropriate alternative beta strategy should consider the whole portfolio,” she said.
“In addition, institutions should appreciate that risk premia choices are only the beginning and the product range is highly heterogeneous so manager selection makes a significant difference to portfolio outcome and combining managers can be beneficial to diversification.”
The report says that the overwhelming majority of alternative beta managers – 94 per cent – are offering flat fee structures because of the investor demand for that low cost and simplicity.
However, it says: “Our research shows that actual price varies from the headline figure hugely as in practice significant discounts can be achieved, despite the phasing out of some ‘early bird’ offers in 2016.”
The report says that the majority of the broad-spectrum managers – though not all – tend to focus on the academically established alternative risk premia of value, carry, momentum and/or trend-following.
Hedge fund managers have launched alternative beta products alongside existing funds which include CTAs, systematic macro funds and multi-strategy systematic managers, often targeting more esoteric betas.
The majority of alternative beta products include a range of sub-strategies across asset classes, but there are a number of asset class- or strategy-specific offerings.
Targeting specific strategies, such as core-trend following, alongside broad multi-premia managers can be advantageous. But, one size does not fit all investors.
“With diversification as the primary objective, the construction of an appropriate alternative beta strategy for a particular investor should consider the interaction with the rest of that portfolio. Not all alternative beta sub-strategies prove beneficial in each case,” the report says.
* Greg Bright is publisher of Investor Strategy News (Australia)