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.”