The CFM alternative beta program is designed to be a robust diversifier to portfolios based on traditional asset mixes and is a reflection of the firm’s 25 years of experience in implementing systematic trading strategies. The program is diversified across 6 strategies that have all been exploited in the history of CFM’s absolute alpha offerings. In this document we discuss how alternative beta can be combined with traditional benchmarks to produce the best forward looking returns.

The document is organized as follows:

  • We define “alternative beta” strategies, which include both persistent “alternative risk premia” and other market anomalies. We discuss the selection of these strategies, as well as key implementation concerns.
  • We then discuss how, in our view, a diversified portfolio of alternative beta strategies should be built, including risk targeting and weighting across strategies. CFM proposes that equal risk weighting is the most robust allocation scheme. We suggest a volatility target around 10% is a reasonable trade-off between expected return and leverage.
  • In support of our case for alternative beta strategies, we present a “forward looking” analysis which relies on a set of simple and conservative hypotheses to model future returns given changes to a proposed typical investor portfolio made up of traditional benchmark investments.
  • We illustrate the potential effect of including a diversified portfolio of alternative beta strategies funded
    from the proposed traditional portfolio. Based on this analysis, we suggest an allocation of 30% to alternative beta strategies. This results in a 32% increase in expected excess return, and more importantly in a reduction of volatility of
    25%.

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CAPITAL FUND MANAGEMENT LLP (CFM)
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