While the development of smart beta may be viewed by some as a threat to hedge funds, Emma Cusworth argues such strategies can help investors identify true active managers.
“Alternative beta sheds a lot more transparency on what hedge funds are doing in some areas.”
Matthew Towsey, Aon Hewitt
It has been argued that alpha is really just a new beta waiting to be discovered. To some extent, the success of ‘smart beta’ and ‘alternative beta’ strategies in recent years puts proof behind the old saying. A big part of that has been not just a better understanding among investors of alpha, beta and the sources of return, but also a greater ability to compare hedge funds’ performance against betas that can be systematically replicated.
That said, as much as these products create a challenge to hedge funds, they also work in favour of those who are genuinely able to bring something new to the table. The evolution of smart beta in the long- only space and subsequently long/short alternative beta strategies is a natural consequence of a world dominated by super low interest rates, in which investors are forced to dig deeper to root out both returns and value for money.
As Nizam Hamid, head of strategy at WisdomTree says: “In a relatively low interest rate environment, the focus on cost makes a big difference to total returns over a five to ten-year horizon. Where investors are paying higher fees and managers lack consistency of returns or fail to deliver alpha, that is pushing investors to look at cheaper, more simple products.”
The best way to achieve both objectives is to better understand exactly what drives the returns on offer and whether the funds delivering them represent real value for money.
