| Doctor Alpha & Mister Beta: For better and for worse |
|
|
| 01/10/2006 | |
|
Take it for granted: alpha and beta are inseparable twins – according to the experts at a conference organised by bfinance, the flavour of the day would even be their combination and the portability of both performance engines. "The portable alpha concept is all about identifying a source of stable alpha generation and then carving it within a traditional asset allocation," says Cyrille Albert-Roulhac, in charge of institutional investor relations at Lyxor Finance. "To the extent that a pure portable alpha strategy has a cost due to the need to neutralise the betas, it is often better to use them together, and both have a diversifying effect. As for the portable beta concept, it is based on the identification of those risk factors that are likely to bring even more diversification to the allocation." In other words, this approach of combining the alpha and the beta allows an investor to increase their equity allocation while leaving their risk profile unchanged, or even decreasing their normal risks (volatility) and extreme risks (skewness and kurtosis). Such beta is managed dynamically. That's what Denis Cohen Bengio, Head of Investment Solutions Product Specialists at AXA IM, explains: "One should not disparage the beta and try to wipe it out. The research of performance lays on a fine equilibrium of added value sources, which is itself based on three pillars: the global management of risk, a dynamic asset allocation approach – this is the beta, and, last but not least, the alpha selection that is all about investing on various performing strategies." The dynamic management of beta is designed to maintain or strengthen the equity allocation in an uncertain market. "The exposure to equity market is non-linear; the dynamic management of beta is developed to catch the upward trends and avoid the downward trends," explains Mr Albert-Roulhac. Strategic diversification The grouping of alpha and beta is anchored in the idea of strategic diversification. The asset managers and experts– at least the best among them – have a fertile imagination to find new sources of performance. Beta is everywhere: classic interest rate curve strategies as well as various exposures to the equity markets (countries, sectors, themes, quantitative, spread…), but also more esoteric strategies: volatility, correlation, agricultural funds, water, CO2, not forgetting securitization products. As long as it moves, it can be considered. Most of the time, those strategies are active, that is, managed dynamically within a strict risk control framework. "I prefer to talk about the dynamic rather than the tactical asset allocation. The strict risk process to which it is subject allows us to have a total return management style," says Mr Cohen Bengio, pointing to the fundamental need to implement trend following strategies rather than to try to forecast movements. Not only is the risk management controlled, it is also subject to a budgeting process. With regards to this, says Mr Cohen-Bengio, "the Black & Litterman (1990) approach helps building more robust allocations than those built under the Markowitz model. Black & Litterman allows one to go beyond the manager's flair and to distinguish the bets from their implementation." M.N. |
|
Related articles |
|
Articles of the same Topic : Alternatives |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it