Numbers might give you some comfort but they don’t tell the whole story, according to CFS. To get that, you have to dig a little deeper – and take a lot of meetings.
The passive giant’s former super boss has found a new home at Bell Asset Management, and comes into the increasingly tough business of active management with his “eyes wide open”.
Towards an industry standard in alternative beta
Lars Jaeger
Lars Jaeger, a scientist who made his name in the investment world developing alternative beta strategies, has a big new mission. He is helping the global asset manager GAM, of which he is head of quantitative research in the Alternative Investment Solutions team, to build a platform of alternative risk premia as an industry standard.
Jaeger, visiting Australia last week, said GAM’s current alternative risk premia platform has 25-30 separate strategies, which most institutional clients were interested in taking on as a whole and actively managed portfolio. Very large pension funds and sovereign wealth funds might consider single-strategy mandates instead.
“We have a large spectrum of return drivers,” Jaeger said. “We’re the only player in the market that’s investing in alternative risk premia with a track record of more than ten years and includes real world experience for 2008.”
Jaeger started exploring the separation of hedge fund alphas and betas in about 2002, when he was at Partners Group in charge of the firm’s hedge fund program. “I wanted to understand how to value hedge fund performance. I came to the conclusion that a lot of the returns from hedge funds were due to betas, rather than pure skill or alpha.”
The group launched its alternative beta strategies in 2004, the first mainstream fund manager to do so. “We pride ourselves on having started this,” Jaeger said. “We seeded it with our own capital and then went to the market in 2006.”
The strategies did fairly well in 2007, which is the year when a lot of other quantitative managers turned in poor performance – allegedly because of the weight of money which went into their strategies.
Jaeger and his team spun out of Partners Group to form their own boutique, Alternative Beta Partners, and then in late 2014 after lengthy discussions decided to partner with a new big brother at GAM. GAM has a risk premia team of eight people. GAM’s diversified Alternatives Risk Premia strategy has delivered annualised returns of 4.8 per cent with a Sharpe ratio of 1.25 since March 2012. Importantly, the correlation with equities is only 0.32 and with bonds 0.06.
GAM does a number of things differently to the handful of others who also look to provide alternative risk premia performance. It uses three main styles – value, momentum and carry – across the asset classes of equities, fixed income, commodities and foreign exchange. A sample portfolio assigns 41 per cent to value, 24 per cent to momentum and 35 per cent to carry. GAM has several individual risk premia strategies within each style.
For currency management, for instance, it tends to go long those currencies with high purchasing power. For a country like Switzerland, where Jaeger lives, this seems to be inevitably an underweight.
“Some people forget that Switzerland is a country and not just a currency,” he jokes. “It’s been over-valued for 30 years, but no-one seems to care. It always benefits from a flight to quality [after a market scare], much like gold.”
GAM does what it calls ‘expected drawdown analysis’ to minimise drawdowns and deliver an output of a risk-neutral portfolio for implementation, assign risk weightings to all positions within each premia strategy and actively review and enhance exposures, rebalancing at least monthly. This form of risk management is similar to volatility-focused risk parity, but GAM focuses rather on drawdowns not volatility as their view this as a better measure of expected risk.
In Australia, the development of alternative beta strategies for super funds has been helped along by interest from consultants JANA Investment Advisers and Towers Watson. Towers Watson’s annual hedge fund paper, published last month, devotes a good amount of space to alternative beta and how it can be used in a portfolio. The seminal work quoted on the topic, though, was written by Jaeger and published as a 260-page book – ‘Alternative Beta Strategies and Hedge Fund Replication’ – in 2008.
Jaeger and GAM are not index managers. They simply want to use every tool available to them to maximize returns – both active and systematic. Because of its fee advantage and greater certainty of outcome, alternative risk premia is a tool which is gaining in popularity alongside other smart beta strategies.
Jaeger has also written three other books on risk management and new investment strategies as well as numerous papers. He stays true to his academic roots. In his spare time he blogs on scientific matters to do with both physics and philosophy. His PhD was in theoretical physics from the Max-Planck Institute for Physics of Complex Systems.
– Greg Bright
