Alpha bets for the masses a tough sell: Panel

Alternatives seen as crucial to portfolio constructions, but risk premium still a turn off for many

Apr 30, 2013 @ 12:21 pm

By Jeff Benjamin

+ Zoom

Alternative investments have a place in just about any portfolio, but that doesn't mean every alternative investment has a place in any portfolio.

That is essentially the riddle that three industry wonks wrestled with Monday afternoon in Seattle at the Investment Management Consultants Association annual conference.

“The promise is, over the long haul, you're going to get a better risk-adjusted return stream with alternatives, but that doesn't mean you'll always outperform,” said Robert Whitelaw, finance chairman at the Leonard N. Stern School of Business, University of New York.

“In the long run access to alpha is access to risk premia,” he added.

Bob Rice, founder and managing partner at Tangent Capital LLC, said alternative investments should be viewed through the four main things they can do inside a portfolio: Provide greater current income, reduce risk, provide home-run potential, and provide protection against inflation and currency devaluation. “But you have to break it all down by strategy rather than talking about them in aggregate,” he cautioned.

Christopher Geczy, adjunct associate professor of finance at The Wharton School, University of Pennsylvania, laid the foundation for the debate on alternatives by highlighting the relative performance of alternative strategies.

“If you don't include volatility into your portfolio strategy you will be subject to it,” he said. “We have market cycles, they've been here forever and they always will be. And the only thing that goes up in a crisis is correlation.”

Thus, while it was generally agreed that alternatives are essential in portfolio construction, it does require a certain leap of faith, according to Mr. Whitelaw.

“You have to buy into the idea that there is risk premia with alternatives,” he said. “We're still arguing about the risk premia for equities and we've got 200 years of data.”

When it comes to getting alternatives to the masses, the panel seemed to agree that progress is being made through more registered investment products like mutual funds -- but there is still a long way to go. “I think the industry has fallen down on turning alternatives into an investible strategy, although a lot of these strategies are becoming more and more liquid because of the legal wrappers,” Mr. Rice said.

In some respects, the biggest progress of the legal wrappers is the pressure the products are placing on fees in the alternatives space.

“There are strategies where (a 2% management fee and a 20% performance fee) makes sense but there aren't tons of them,” Mr. Rice said. “I'm not sure I've seen a hedge fund manager in the long-short world who could justify a 2-and-20 fee. But there are some long-short mutual funds now where the performance is good and the fees are reasonable.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

Events

Building a practice for tomorrow's tomorrow

Advisers: it is time to take a long view of your practice. Check out some tips and strategies on how to do it (and why) with Tom Stefaniak of Pinnacle Wealth Management.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

LPL retains $570 million with super-OSJ deal

Kansas-based nVision Wealth will come under supervision of Chicago-based IHT Wealth Management.

How does your advisory firm stack up?

Comparing a firm's pay to the competition can point out vast flaws.

10 signs your client is cheating on you

Sure signs that clients may be on the way out the door.

Morgan Stanley sees slower fee-based asset flows on fiduciary rule delay

Flows to advisory accounts, while still higher than the start of 2016, dropped off more than 20% from Q2 and were the lowest in a year.

How adviser salaries stack up to other jobs

Median compensation hovers just under $100,000 on the low end and reaches nearly $300,000 for bosses.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print