Alternative beta for stable returns
Mathematical tailwinds are not possible amid the low interest rate environment and investors need to look at alternative strategies, Columbia Threadneedle believes.
The firm said investors and advisers needed to work harder just to squeeze returns out of the market.
Columbia Threadneedle managing director and head of Australia, Jon Allen, said "we do think that having an alternative source of return is important, but not to shoot the lights out".
"They are really important in an overall portfolio context simply to help you with that compounding interest in a portfolio," he said.
"When markets are stressed, a lot of traditional assets behave the same way equities, high yield investment credit move in the same direction at the same time.
"If you can find ways on being on the other side of those movements which is what we're trying to do, it becomes a true diversifier."
The firm's deputy head of global investment solutions and alternative investments, Bill Landes, said alternative beta, or liquid alternatives, was starting to gain popularity as a way to lift portfolio returns.
"Alternative beta is not dependent on the direction equity markets move or credit markets move. We're harvesting returns from a different source and it's not dependent on market direction. That's the key," Landes said.
Landes said the aim of alternative beta was to earn the moment risk premium, and not a momentum based equity portfolio.
"We're capturing the returns associated with momentum, value, low beta, size, quality or shape of the curve," Landes said.
"I would argue when you own a momentum equity portfolio or a value equity portfolio you actually own two things — you own the market beta of one, and then you own a risk premium. What we're doing is stripping out the directional behaviour of market beta and owning just momentum or value/quality."
Allen said in Australia, it was currently the early institutional space adopters that were dipping their toes in alternative beta and that the next wave would be form the wholesale space.
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