In the book, Ineichen, who back in 2000 and 2001 wrote UBS’s most reprinted pieces of research, The Search for Alpha and The Search for Alpha Continues, argues that the concepts of alpha and beta, and the capital asset pricing model, do not fully capture what alternative investing is all about and questions the value of long-only management.
“Alpha is a term from the 1960’s,” he says in the interview. “It relies on a linear model that is now somewhat outdated. Now we think, model and manage in a non-linear environment. While alpha and beta are convenient, I think perhaps we need to move on. Asymmetric Returns attempts to define this space beyond the CAPM…..we need to move beyond orthodox finance which argues that markets are perfectly efficient and random. That is so untrue it hurts.”
Ineichen wants to move away from the term alpha. We here at FT Alphaville won’t take it personally - here are a few other highlights:
AM: A lot has been written recently about “130/30″ strategies. What is your take on this trend?
That’s an innovation coming out of traditional asset management which, in my view, is a direct response to absolute return investing. It rests on the argument that constraining a skilled manager is bad for performance. That’s a very powerful argument and cannot be refuted.
AM: In your view, is “30″ a magic number?
No. It started as “120/20″ and morphed into “130/30″. But even that’s not fixed. Some in the hedge funds of funds industry are actually responding by launching their own products called “170/70″!
AM: Is the concept of portable alpha becoming passe?
That term is being somewhat overtaken by other labels. But the ideas remain the same. I’ve always felt that portable alpha clients were our happiest clients. Their returns expectations were almost always met because they expected, say 300-500 basis points from their alpha engine. And guess what, that’s what they got. A lot of other institutions that invested in funds of hedge funds solely to outperform long-only equities starting in, say, 2003 might have been disappointed with their returns relative to long-only equities during this period. But over the long run, funds of hedge funds have outperformed equities by a mile. In other words, some investors tend to look too closely at the recent past.
AM: Has risk appetite changed over this time period?
Yes. Appetite for volatility has been increasing a lot recently. In fact, I remember a time in 2001 when investors wanted a market neutral product with a volatility of 2.5% and a capital guarantee. Now, they want 130/30 which has equity-like volatility! So within only five or six years we’ve gone from one extreme - volatility of 2.5% with capital protection - to equity-like volatility.
AM: In your book you said “in April 2004, we once head someone say at a hedge fund conference that ‘whenever Main Street falls in love with what Wall Street has to sell, there’s a correction in the next 12-36 months’” At the time of writing, you were 24 months on. Now we are 35 months on. Is there a hedge fund bubble that risks being burst?
Sure, there’s an element of cyclicality mixed with a fundamental structural change in the asset management industry. I’m not trying to advocate that human nature doesn’t have a tendency to “overshoot”. But this still leaves us with a paradigm shift in the asset management industry that is changing the way we think about risk and asset allocation. And that’s secular, not cyclical.
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