Time to place your alpha bets
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Time to place your alpha bets

Traditional active equity asset managers are alienating their institutional clients through underperfomance and high fees. Many pension funds and insurance companies in the US, UK and Europe are embracing passive index tracking, while others are devoting more attention to the rewards - and the risks - of hedge fund investing. The search is on for performance, or alpha, wherever it may be found. The whole asset management business may soon be transformed. Peter Lee reports.

There's a new buzz in the asset management business around a concept called portable alpha. Put simply, this states that if a specialist fund manager can generate sustainable outperformance in any given market, it is quite legitimate - even advisable - for a fund to combine this alpha, or excess value, with a core strategic exposure to a quite unrelated market. So if an American pension fund makes a strategic asset allocation to, say, US equities and chooses the S&P500 index as the benchmark to measure its funds against, it does not therefore follow that it has to seek to beat this benchmark by appointing a manager who is clever at picking US stocks. It could do away with its poorly performing and expensive stock-pickers and pour money instead into various market-neutral, event-driven, long/short or tactical trading hedge funds.

"In a wired world how can the manager of a $20 billion pension fund predominantly invested in big liquid markets possibly expect to beat his auntie when she has access to all the investment banks' research and can trade on-line, especially when that fund manager has to go to a committee to make his decisions?" asks Ronald Layard-Liesching, head of research at Pareto Partners, a fund management boutique.

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