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050 newsflash
Look to diversify in to alpha
Investors should look to alpha-focused strategies because they do not depend on
market direction
Equity market beta – the return attributable to the market only – is a volatile and
unpredictable source of returns
SYDNEY 27 November 2013 – Investors should look to alpha-focused strategies because
they do not depend on market direction and they are uncorrelated or lowly correlated to
market indices, a leading fund manager advises.
Pengana Capital’s Damian Crowley says that ‘beta-investment strategies which generate
returns mainly due to the market are unlikely to perform as well in the next three to five
years’.
Crowley agrees that alpha managers may introduce new risks to portfolios, but he adds,
‘the more fundamentally different risk-and-return drivers that are in a portfolio, the more
diversification it has’.
The assumption that markets are efficient and that investors should be ambivalent about
the timing of their investment is not borne out in practice,’ he says.
‘Equity market beta – the return attributable to the market only – is a volatile and
unpredictable source of returns. It can generate significant gains and losses, and gives
limited diversification from other equity markets. Also, timing is everything in this area.’
In contrast, Crowley says, a market-neutral strategy has a low exposure to movements by
hedging out the market risk through short positions in equities or equity derivatives such as
futures.
‘Because most of the market risk is removed, the returns are generated by the manager’s
investment skill, rather than rises or falls in equities overall,’ he says.
© Chris Hocking Strategies 0418 603 694 [email protected] www.chstrategies.com.au
This alpha is far more stable, consistent and predictable, he says. The range of returns and
maximum peak to trough loss (or maximum drawdown) is far narrower and the correlation
with the equity market is negative in a number of periods.
As to the cost, Crowley says ‘beta is cheap, but it isn’t free’. The management of a beta
only portfolio can approach 0.5 per cent a year, taking into account market impact,
rebalancing, holding costs and commissions.
‘Alpha on the other hand is more expensive, but it’s scarce so arguably it should be,’ says
Crowley. ‘Hedge fund managers typically charge higher fees when compared to traditional
long-only managers, but expressing the fee as a percentage of the alpha generated puts
hedge fund managers in a far more favourable light.’
Pengana Capital Funds
Annual Total Returns (%) to September 2013
Year
Australian Equity
2009
2010
2011
2012
2013
Emerging Australian Equities
Companies
Market Neutral
Global
Resources
Asia Special Equally Weighted S&P
Events
Portfolio Acc
20.2
8.6
2.4
19.3
24.1
10.3
16.1
-5.1
13.3
31.5
2.4
17.0
11.4
5.9
11.1
6.3
30.3
0.2
3.6
-5.2
26.2
11.0
7.4
4.4
12.1
13.1
16.6
3.3
9.3
14.7
14.6
10.3
-13.8
12.6
18.6
-32.2
9.5
8.1
-13.4
6.4
16.9
-26.1
12.0
6.4
-4.1
11.5
8.1
-9.4
Pengana Fund Features 5 years
to 30 September 2013 (%)
Annualised Return
Annualised Volatility
Maximum Drawdown
Best Performer
Worst Performer
Disclaimer:
Total return performance figures are shown after all fees and charges and assume reinvestment of
distributions. Past performance is not a reliable indicator of future performance. The performance figures for
the Pengana Asia Special Events (Onshore) Fund (shown above) include, for the period prior to 1 September
2010, the since inception returns for the Australian dollar denominated shares issued by the Pengana Asia
Special Events (Offshore) Fund adjusted to reflect the different fees. The strategy inception date is 1 October
2008. The Onshore Fund is fully invested into the Offshore Fund. The performance figures for the Pengana
Australian Equities Market Neutral Fund prior to July 2010 are for an internal fund seeded by Pengana
Capital.
© Chris Hocking Strategies 0418 603 694 [email protected] www.chstrategies.com.au
Damian Crowley
Director of Distribution
Pengana Capital
(02) 8524-9970 0422 466 895
[email protected]
www.pengana.com
Christopher Hocking
0418 603 694
[email protected]
chstrategies.com.au
Twitter: CH_Strategies
© Chris Hocking Strategies 0418 603 694 [email protected] www.chstrategies.com.au