Investors eschewing beta in ‘frantic search’ for excess return

A global trend by investors to shun beta in favour of alpha strategies in driving excess return is inevitably going to end in tears, according to Tim Barron, chief executive of US-based investment consultant RogersCasey.

Addressing an Australian Unity Investments adviser briefing in Sydney yesterday, Barron said both institutional and individual investors are “eschewing the value of beta as a traditional source of excess return in a somewhat frantic search for alpha-driven excess returns”.

“The marketplace appears to be assigning very little risk to esoteric strategies, such as hedge funds and private equity — almost as if excess return is somehow easier to find outside of conventional beta-driven strategies.

“Frankly, it’s quite amazing that the market should abandon traditional sources of finding excess return to chase more complex alpha engines, which don’t have the transparency of the traditional sources, and where the time horizons may be longer.”

Barron said the “upshot of so many people searching for something that has always been elusive, and will likely always remain elusive, is that there are going to be a lot of unhappy investors out there”.

“To rely upon alpha-capture as the only source of long-term return, or, in essence, to ignore traditional sources like beta, seems to be a mug’s game if we all try to do it at the same time with massive amounts of money.

“The fact that there has been such a dramatic push of money into hedge funds and into private equity in the US, for example, actually reduces the chance of earning excess return rather than increases it,” he added.