SWEDEN - An official at the SEK66bn (e7.15bn) Sjunde AP-fonden (AP7) has called for more products to aid the structural separation of alpha and beta, a separation AP7 has been trialling since January.
Executive vice president Richard Grottheim said the separation of managers into alpha and beta had been the subject of much talk in the market, but so far very few products had been launched to meet demand.
“Hedge funds argue that they have this kind of product, but a hedge fund has a lot of beta in it, and we want pure alpha,” he said.
Asked what specific products might assist AP7’s current trial separation of its internal domestic equities managers, Grottheim said: “I would like to see a European or Japanese market-neutral long-short product, a pure stock picking equity product.”
The aim of the fund’s trial separation is to expose market risk, said Grottheim. To have cost efficient and cheap beta generation on the passive side, and then to have the alpha team pursue a market-neuteral long-short approach where long decisions are financed by shorting the bad stocks.
“We allocate a risk budget so if over time it turns out to be a bad result, then we can allocate risk capital,” he explained. “But hopefully in the long run it will gradually grow the capital.”
Grottheim said the fund had decided the separation might prove a more cost-efficient way of managing capital over the long term. It also had strategic practicalities as a clearer way of separating the two sources of return, he added.
The trial will last six months, at which point AP7 will decide whether to extend the separation across the whole portfolio.
Eleanor de Freitas, head of index strategy at Barclays Global Investors, said alpha beta separation had recently become more common: “We’ve seen a lot of participants in the market talking about that and we expect that separation to take place more and more, with people going into passive beta strategies to deliver the core beta performance of their overall strategic benchmark choice.”
“Analysis has shown you are buying a lot of beta when you buy some active strategies, and actually your management fee might be better spent in getting an index provider to deliver the beta portion, and then have an active manager purely focused on delivering alpha without taking beta bets.”
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