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Finweek English Edition - - COMPANIES & INVESTMENTS -

Ac­tive Beta Man­age­ment to dom­i­nate Ac­tive Alpha Man­age­ment The fu­ture of as­set man­age­ment is not about beat­ing bench­marks. It is not about alpha, and it is not about Ab­so­lute Re­turn. The fu­ture of as­set man­age­ment will change in two ways. Firstly, in­vestors will start to prop­erly ad­just for mul­ti­ple risks when it comes to bench­mark­ing. This will change our per­cep­tion of alpha for­ever.

Se­condly, clients will de­mand ac­tive risk man­age­ment in­stead of ac­tive re­turn man­age­ment. This re­quires a to­tally dif­fer­ent way to build port­fo­lios. In fu­ture, we will need to be­come beta or risk ex­perts, not alpha ex­perts. Be­tas ex­plain over 90% of port­fo­lio re­turn vari­abil­ity; alpha less than 10%.

The im­mi­nent fu­ture of as­set man­age­ment is there­fore in­deed very strange. “IS IT ALPHA? BE CARE­FUL. BY DE­SCRIB­ING FUND RE­TURNS AS ALPHA, MAN­AGERS AC­KNOWL­EDGE THAT THEY ARE REL­A­TIVE-RE­TURN IN­VESTORS! ALPHA IS DE­FINED AS A REL­A­TIVE RE­TURN, THE RE­TURN GEN­ER­ATED OVER AND ABOVE THE MAN­AGER’S BETA EX­PO­SURE, OR BENCH­MARK. SO, THE TERM ‘AB­SO­LUTE-RE­TURN IN­VEST­ING’ HAS

NO MEAN­ING. IT MISLEADS THE LIS­TENER INTO THINK­ING IT HAS SUB­STANCE THAT IT DOES NOT HAVE, AND IN OUR OPIN­ION, THE TERM SIM­PLY

SHOULD NOT BE USED.”

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