Heads Down, Mouths Shut: The Distracted Generation
To say there is a lot going on in the world right now is probably an understatement. The current events of the moment are so cumbersome and so complex that for many it has become emotionally and physically taxing.
The interesting thing about the emotion piece is that most of us are walking around unable to muster up emotion for anyone or anything that doesn’t directly affect our own lives. That is to say that we would rather lose ourselves in the joy of Beyonce’s pregnancy or the latest You Tube video of someone making a fool of themselves in an effort to ignore and/or not fully participate in the more pressing issues of the moment. As an avid watcher of the hit show: The Walking Dead, I am more and more convinced that our story – like the show will never be about the zombies or the villains who destroyed humanity; but rather the human beings that were so out of touch with reality that they allowed it to happen.
Of course there will be the bunch who say: “I can enjoy pop culture and be just as socially vigilant as the next soldier”. Sure you can. I will not deny you your joy. Lose yourself. However, I will wager you that the people dying in Aleppo have no distractions; nothing to divert their attention from the daily horror of their own lives. The biggest diversion those poor people have is the pain of losing loved ones, the periodic pleas over social media to save them, and the hunger pangs plaguing them for weeks at a time.
Do you think the people of Flint, Michigan have the luxury of caring about pop culture or the latest viral video when they are going on their third year of having lead-ridden water to drink, cook, and bathe with?
What freedom to divert attention do the people of Pinellas County, Florida have as 95% of their students continue to fail reading and writing with a white-run board of education who prides themselves on incarcerating young black children for minor offenses?
Enjoy your diversions, your bubbles, and all of the things that make you comfortable and happy daily. I simply hope that the freedom to enjoy those things is never taken away from you. I hope you never have to become invisible to a whole society of people who value their diversions more than your well-being.
I hope that you never encounter an injustice so horrible that people leave you to cope in deafening silence, because they are afraid to lose what little has been afforded them.
By all means, keep your head down at that job where you can’t seem to make strides, but affords you a regular check. Keep your mouth shut so as to not stir your friends, family and professional network – I’m sure they will all come to your rescue should misfortune befall you.
Personally, I cannot keep my head down. I will not keep quiet. I have watched enough atrocities to know that I am quite fortunate and at any moment it can all be taken away from me. Nothing that is granted is indefinite. I know enough to know that I cannot cure all of society’s ills, but I know that to not step up and lend a hand is a moral sin.
As we all continue to watch many of the constructs of society and government crumble before us, we need to ask ourselves whether we are going to be proactive and do our part; or wait until misfortune hits closer to home to snap out of it and into action.
Please know the goal has always been for each of us to be so wrapped up in self-preservation, survival and distractions that we remain oblivious to all of the underhanded things going on right under our noses.
If you want to know what’s going on you merely have to stop and pay attention to what is going on and the connectivity of each event. Enjoy the glimmers of beauty still present for our enjoyment regularly; but please also recognize that your ability to enjoy those moments is a privilege many do not have.
Ultimately it is your choice to stay abreast or to live in ignorance. Choose wisely.
Alternative Beta Strategies: Alpha/Beta Separation Comes to Hedge Funds
Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies, J.P. Morgan Asset Management
A quiet revolution is taking place in the alternatives world. The idea of alpha/beta separation has finally made its way from traditional to alternative investing. This development brings with it a more transparent, liquid and cost-effective approach to accessing the “alternative beta” component of hedge fund return and a new means for benchmarking hedge fund managers.
The good news for investors is that the separation of hedge fund return into its components—rules-based alternative beta and active manager alpha—has the potential to shift investing as we know it. These advancements could democratize hedge funds and, at long last, make what are essentially hedge fund strategies available to all investors—even those who aren’t willing to hand over the hefty fees often associated with hedge fund investing.
A benchmark for alternatives
With respect to traditional equity investing, we have long accepted the idea that there is a market return, or beta—but this hasn’t always been the case. Investors used to assume that to make money in the stock markets, one needed to buy the right stocks and avoid the wrong ones. The idea of a market return independent of skilled stock selection seemed ridiculous to most market participants. Yet today, we would never invest in an active manager’s strategy without benchmarking it against its respective beta.
Interestingly, hedge fund managers have been held to a different standard. Investors have been much more willing to accept the notion that hedge fund strategy returns are pure alpha, and that their investment returns are based entirely on the skill of the fund manager. That notion explains why investors have been willing to accept a “two and twenty” fee structure just to access what has been perceived as one of the most sophisticated and powerful investment vehicles available.
In thinking about the concept of beta, consider its precise definition—the return achievable by taking on a systematic exposure to an economically compensated risk. In traditional long only equity investing, the traditional market beta has been further refined as a number of other risks have been identified that are commonly referred to as “strategic beta.” These include factors such as value, momentum, quality and size. But no one ever said that these risk factors must be long-only.
Over the past decade, as more hedge fund data became available, academics began to disaggregate hedge fund return into two components: compensation for a systematic exposure to a long/short type of risk (alternative beta), and an unexplained “manager alpha.” What they found is that a significant portion of hedge fund return can be attributed to alternative beta. That fact has turned the tables on how we look at hedge fund return. With the introduction of the alternative beta concept, hedge fund managers will have to state their results, not just in terms of total return, but also as excess return over an alternative beta benchmark.
Merger arbitrage—an alternative beta example
The merger arbitrage hedge fund style can be used to illustrate the alternative beta concept. In the case of merger arbitrage, the beta strategy would be the systematic process of going long every target company, while shorting its acquirer. There is an inherent return to this strategy because the target stock price typically does not immediately rise to the offer price upon the deal’s announcement. This creates an opportunity to purchase the stock at a discount prior to the deal’s completion. The premium that remains is compensation to the investor for bearing the risk that the deal may fail.
Active merger arbitrage managers can add value by choosing to invest in some deals while avoiding others. Therefore, their benchmark should be the “enter every deal” strategy, not cash. In fact, the beta strategy explains the majority of the return to the average merger arbitrage hedge fund. And it doesn’t stop there. Other hedge fund styles that can be explained using alternative beta include equity long/short, global macro, and event driven. Note that the beta strategy invests in the same securities, using the same long/short techniques as the hedge fund strategy. The difference is that the beta strategy is a rules-based version that can become the benchmark for the hedge fund strategy. After all, if a hedge fund strategy cannot beat its respective rules-based benchmark (net of fees), an investor may be wiser to stick to the beta strategy.
Implications for investors
What does all this mean for the end investor? Hedge funds have traditionally been the domain of sophisticated investors willing to pay high fees and sacrifice liquidity. Alpha/beta separation in the hedge fund world means that investors can finally choose whether to buy the active version of the hedge fund strategy or opt for the passive (beta) version. Hedge fund strategies can be effective portfolio diversifiers. Now, through alternative beta, virtually all investors can access what are essentially hedge fund strategies in a low cost, liquid, and fully transparent form. For investors who haven’t had prior access to hedge funds, this could be welcome news. Not only can investors look at an active hedge fund manager’s strategy and determine how it has done compared to the systematic beta equivalent, they can also invest in ETFs that encapsulate these systematic strategies.
When looking at one’s traditional balanced portfolio today, there are plenty of questions around whether the fixed income portion will achieve the same level of diversification it has provided in the past. After all, with yields still low, there is little income return. Additionally, the capital gains that came from interest rate declines are likely to reverse. With fixed income unlikely to adequately fulfill its traditional role in portfolios, there is a need to find an alternative source of diversification. This is where alternative strategies may help. For investors seeking to access diversifying strategies in liquid and low-cost vehicles, alternative beta strategies in ETF form are one option.
Looking for an alternative to enhance diversification in your portfolio?
For investors looking to further diversify their overall portfolio, JPMorgan Diversified Alternatives ETF (JPHF) seeks to increase diversification and reduce overall portfolio volatility through direct, diversified exposure to hedge fund strategies using a bottom-up, rules-based approach.
Learn more about JPHF and J.P. Morgan’s suite of ETFs here.
Call 1-844-4JPM-ETF or visit www.jpmorganetfs.com to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.
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