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Indexes and Benchmarking - October 21, 2015

Alternative Equity Beta Investing: A Survey

EDHEC-Risk Institute carried out its survey among a representative sample of 128 investment professionals at the beginning of 2014, as part of the Société Générale Prime Services (Newedge) research chair on “Advanced Modelling for Alternative Investments”. The aim of the study is to give an overall view on alternative equity beta strategies, to determine the areas of usage and to analyse the alternative equity beta practices and perceptions of investment professionals.

Alternative equity beta investing has attracted increased attention within the industry recently. Though products in this segment currently represent only a fraction of overall assets, there has been tremendous growth recently in terms of both assets under management and new product development.

Investment practices in alternative equity beta strategies are currently evolving at a fast pace, in line with an increasing variety of product offerings, and our survey was thus not aimed at providing a definitive account of practices in this area. However, with offerings and communication by providers increasing, the discussion of such strategies rarely provides a buy-side perspective. Our survey aims to fill this gap and provide the investors’ perspective on such strategies. In our survey, we prefer the term “alternative equity beta” to refer to such strategies. The objective of our survey was to gain insights into investor perceptions relating to such advanced beta equity strategies, but also into the current uses they make of such strategies. We cover both long-only strategies and long/short strategies but focus specifically on equity investments, and deliberately omit questions concerning alternative beta strategies in other asset classes. We asked respondents about their current use, familiarity, satisfaction, and future plans with alternative beta strategies. Moreover, we gathered information on the due diligence process and the quality criteria that investors use to evaluate such strategies and assess their suitability for their own investment context.

Among the key findings of the survey:

  • Investors are familiar with the construction principles of advanced beta strategies, but less familiar with underlying risks and drivers of performance. According to EDHEC-Risk Institute, this lack of knowledge on risks poses a problem not only for the proper use of these alternative equity beta strategies, but also with respect to them being fairly marketed.
  • Respondents allocate relatively few resources to the evaluation of alternative beta. The average respondent uses fewer than two full-time staff (1.77) to evaluate alternative beta offerings, a much lower number than that used to evaluate active managers (3.42).
  • This shortfall in resources is illogical given that the same respondents see bigger challenges when evaluating advanced beta offerings, than when evaluating active products.
  • Lack of access to data, in particular live and after-cost performance, are seen as key challenges, especially as for all types of risks, respondents agree that information is not widely available from product providers.
  • Respondents’ answers show that the theoretical justification of a strategy is seen as about as important as live performance, highlighting the need for product providers to focus not only on recent performance but also on the fundamental economic reasons for a strategy’s performance benefits.
  • Implementation is a key aspect for respondents, who commonly use a wide array of measures to assess implementation of alternative equity beta strategies (turnover, transaction costs, etc.), implying that product providers need to carefully consider implementation in product design.
  • Respondents prefer long-only strategies to gain exposure to alternative risk premia, in particular due to perceived implementation hurdles for long/short strategies.
  • Respondents require more from factor investing strategies than simply providing the right direction of exposure, notably to provide an efficient risk-adjusted return for a factor exposure, with ease of implementation.

While the survey results suggest that advanced beta equity investing is a promising avenue for the investment industry, results also contain a note of caution, in that there is a risk that the good idea of advanced beta equity investing may end up being compromised by practical investment challenges and perceived insufficiencies of current products, notably in the form of insufficient transparency and on the difficulties in implementing long/short strategies.

This research was produced as part of the Société Générale Prime Services (Newedge) "Advanced Modelling for Alternative Investments" research chair at EDHEC-Risk Institute.