Paying alpha fees for beta performance

Contrarian investing will work in the long-term and will deliver extra alpha for investors, a US fund manager believes.

AQR Capital Management founder Clifford Asness said there was a belief alpha was freely available to everybody.

“But it is very hard to pick one of the downsides and then pick the day it happens,” he said at a Russell investment conference in Melbourne.

“This is why I believe being a contrarian investor works long-term.”

Asness said while a lot of managers promise to deliver alpha, the benefit of their promise depends how much is being charged for that performance.

True alpha is often found by small investors who have the ability to move in on positions quickly, he said, which larger institutional investors cannot do.

“The rolling returns of the S&P 500 Index and long/short funds have similar returns,” he said.

“They are both riding beta, but arguably there is a lot of alpha in there as well.”

Asness said as this passing alpha is occurring almost naturally, the question is what sort of fee should the investor be paying.

“You pay low fees for beta indices and the most for true alpha,” he said.

Investors must therefore ensure their manager is delivering true alpha for the fee and not just generating beta from assets.

“You don’t want hedge fund replication from a manager using generic beta assets as they try to imitate the hedge fund’s investment style,” he said.

“Hedge fund replication should be pulled (from a portfolio) and instead find a manager doing something expensive for a cheaper price.”