Is Alternative Beta the New Fixed Income?

Is Alternative Beta the New Fixed Income?

Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF at J.P. Morgan Asset Management

The fee debate raging across mutual funds has long since seeped into hedge funds.

Certainly the direction of travel on hedge fund fees was already downward, as strong industry competition and underwhelming performance have taken their toll. But now as the ability to access certain hedge fund-like returns becomes more readily available in liquid, cost efficient mutual fund formats, the convergence has picked up speed.

In our view, this can only be a good thing for investors. Indeed, we would argue that in what appears to be a rising rate environment on the horizon, lower cost hedge fund-like exposure offers an interesting and diversifying alternative to holding fixed income.

The quantitative cat is out of the bag in the hedge fund world. As we all know, a growing number of academic studies suggest that systematically harvesting a number of well-rewarded factor premiums, such as value, size or momentum, can help ensure enhanced returns in the long run, both in equity and bond markets. A number of industry surveys suggest that institutional investors are embracing a wide variety of quantitative strategies and planning to increase their allocations. Much as the recognition of beta as a driver of returns has empowered the rise of passive investing, the identification of so-called ‘alternative beta’ has led to an understanding of underlying drivers of return in hedge funds – which were once thought to be entirely alpha driven.

Accessing this ‘alternative beta’ involves isolating the systematic, non-manager driven component of returns available from common alternative investment strategies from the alpha generated by individual managers. Conceptually there is no difference between traditional beta and alternative beta, in that they both result from systematic exposures to some risk factor. Just as index investing rewards broad market exposure, so alternative beta will reward exposure to factors such as price momentum, simple carry strategies and the relative performance of attractively and unattractively valued securities.

Alternative beta can be captured using relatively straightforward, rules-based investment strategies in daily tradeable vehicles.

Equal risk weighting to a variety of hedge fund styles can help to control volatility and balance overall risk. Targeting the systematic returns of these alternative strategies has historically rendered little performance correlation with each other or indeed even more importantly with traditional investments in global stocks and bonds. The combination of these strategies in a single portfolio can be calibrated to target a given volatility profile and to seek to deliver a consistent return stream above cash that is independent of the direction of the markets.

We would argue this has taken on renewed significance in light of what would appear to be a market regime change – the reflation trade. If one key driver of portfolios, global bond returns, appears to be coming to the end of a 35 year bull run, then that poses no small portfolio construction challenge for investors. It has led many to pose the question – can lower volatility, well-diversified hedge fund like exposure make up the gap left by traditional long-only fixed income returns?

We would argue that exposure to alternative beta can provide a diversifying source of returns in a period where fixed income’s traditional characteristics may be compromised. Instead of reinvesting more in traditional fixed income, which is burdened by low yields and liquidity concerns, we think investors will increasingly look to alternative sources of less correlated returns. Put another way, in an environment where replacing maturing fixed income exposures at the same level of returns without going way out on the risk/liquidity spectrum has become next to impossible, re-allocation conversations are coming to the forefront. And as investors recognize that the diversification benefits of alternative beta are more and more available in cost efficient vehicles, the pendulum could be set to swing.

Learn more about alternative beta here.


Opinions and statements of market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These views described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost. ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be sold or redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns.
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Solving Your Biggest Client Issue May Be at Your Fingertips

Solving Your Biggest Client Issue May Be at Your Fingertips

Written by: Shileen Weber

When the American Funds’ Capital Group  asked 400 advisors last year to name the biggest issues they face in their businesses, it wasn’t the DOL, market uncertainty or the economy that sat in the center of the idea cloud of answers.

It was client issues.

At a time when regulatory concerns and market turbulence would seem to be at all-time highs, the advisors who answered the survey were most concerned about servicing their clients as well as ways to find new ones and grow their businesses.

It’s one of the ironies of the business, that the things most people find so hard to manage – creating financial plans, managing assets and staying ahead of events – are what advisors find to be the easiest parts of the business. Marketing - the business of selling themselves – can be the area advisors find the hardest elements to master.

In this age of instant communication, it can be even more intimidating to market your practice, especially to younger clients for whom many traditional methods like newsletters, postcards and phone calls don’t work anymore. For them, email is the preferred way to get information, and, if it’s important, they are more likely to respond to texts, not phone calls.

But, it doesn’t have to be that hard. The digital age gives you access to ideas and content of all kinds you can use to touch your clients in a way that positions you as a valuable resource. The key is to keep it simple, stick to some basics and create consistent outreach that clients and potential clients are interested in and will appreciate you sharing with them.

Here is a common-sense approach you can take that will not require you to hire an expensive agency or take valuable time away from managing your clients’ assets and running your business.

Content is King

Create a content calendar for the year: Think about reasons to touch a client 13 times during the year – that can be once a month and on their birthday. (The common rule of sales is that it takes at least 7-13 touches to make a connection.) The number is limited and keeps you from inundating the clients who likely already feel inundated with content. You can take the seasonal approach – tax planning in the fall, January for account review content, college financing in the spring – and supplement it with topical events during the year. Creating a calendar will help you stick to a plan. Here’s one resource for a content calendar.

Review what content is already available to you:  Basically, this means finding the resources you already have and determining what pieces will be most valuable to your clients. Start first by checking out content your broker-dealer already generates that you can personalize. Many firms have economists who write regularly about the market. That’s content you can pass along to keep clients up-to-date they would not have access to anywhere else. In addition to your broker-dealer, mutual funds, your clearing firm, and money managers are all excellent sources of informative and even analytical content.

Personalize the content you use: Add your name, the client’s name or some way to avoid making it feel like canned content that you are using just to check the outreach box. See what capabilities your email program may have to help you.

Related: What's an Investor to Do When History Doesn't Repeat Itself?

The birthday strategy: One advisor used clients’ birthdays in a new way. Instead of the card or lunch date, the advisor asked the client’s spouse for a list of friends he could invite to a birthday lunch and made it a memorable event that was also a soft approach to getting referrals.

Become a curator of good content: What your review will show you is that you don’t have to generate the content yourself. You can point clients to pieces you find insightful. You are likely already doing this every day just to keep yourself informed. The next step is to compile it and send out the very best pieces to your clients, again, with a note with your own thoughts about why you found it valuable.

Find out what is working and do more of it: Use your client interactions, in-person and online, to find out what types of content clients liked and any they didn’t. You can use tracking on your emails to see how many were opened as a measurement tool, but the personal interactions tend to provide more insight than raw data.

Be disciplined about your execution: Get help from an office assistant or schedule the time each month to do the content development and outreach. As any good strategy, if you make it a habit, it won’t seem so hard.

Most importantly, be yourself and be personal: You may want to regularly get personal by talking about your family and hobbies. The ultimate is if you can provide content that is personal to your clients, not just about their investments – they get that from their statements, apps and online portals. Think alma maters, hobbies, children and parents.

Of course, as a disclaimer, you have to make sure all content and communications are complying with regulations and the rules of your own broker-dealer.

The process of creating a plan will get you thinking about your clients in a new way. That exercise alone can re-energize your business and get you seeing marketing opportunities in places you may never have seen them before.

Shileen Weber is Senior Vice President of Marketing and Communications at GWG Holdings. She was previously Director of Online Strategy and Client Experience at RBC Wealth Management, where they placed first in two JD Power and Associates U.S. Full Service Investor Satisfaction Study (2011 and 2013).
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GWG Holdings, Inc. (Nasdaq:GWGH) the parent company of GWG Life, is a financial services company committed to transforming the life insurance industry through disruptive and i ... Click for full bio