Why Alternative Beta?
The CFM investment philosophy derives from a combination of scientific discovery, information technology, algorithmically managed risk, humility and innovation.
CFM is a pioneer of Alternative Beta investing, aiming to provide investors with a low-correlation, low-cost, liquid investment program via a diversified portfolio.
Alternative Beta strategies have historically been associated with hedge funds. Although the underlying traded instruments are often traditional equities and bonds, the returns are generally de-correlated from equity and bond benchmarks. While these strategies have now made their way into more mainstream investment circles, the investment styles continue to be known as “alternative.”
Alternative Beta strategies offer returns correlated to well-known alternative benchmarks, rather than traditional equity or bond benchmarks. It is assumed to be a standard implementation of a standard alternative strategy.
CFM’s flagship Alternative Beta offering, CFM ISDiversified, comprises a mix of simple, well-established strategies that seek to deliver persistent excess returns with scalable capacity, while exhibiting low historical correlation to traditional equity and fixed income benchmarks. For investors, better diversification, provided by de-correlated strategies, can offer improved portfolio outcomes.
While a strict definition of Alternative Beta strategies remains elusive, various important themes tend to emerge:
- Strategies that persist over long periods of time – minimally, decades; sometimes centuries. Levels of statistical significance need to be sufficiently high to establish strong conviction that the systems are not over-fitted but well-anchored in the structure of the markets.
- Strategies that are slower moving, as opposed to the short-term inefficiencies that are generally arbitraged away through time and exploited in an absolute return strategy. Importantly slower strategies tend to be scalable to higher capacity.
- Strategies that are explainable, understandable and plausible
A diversified Alternative Beta program is a mix of simple, well justified strategies, seeking to deliver persistent excess returns with scalable capacity, while exhibiting low correlation to traditional equity and fixed income benchmarks.
Alternative Beta: A third source of returns
Traditional Beta
- Passively managed
- Easy and cheap to access
- Typically longer term
- Not prone to signal decay
- Correlated to traditional markets
Examples
- SPDR S&P 500 ETF (SPY)
- MSCI World (NDDUWI)
- SPDR Barclays Agg. Bond ETF (LAG)
Alternative Beta
- Provides exposure to persistent historical pricing anomalies seeking to generate returns uncorrelated to equity and fixed income beta
Examples
- Trend following futures, market neutral equities, carry trade, short implied volatility, merger arbitrage, other risk premia
True Alpha
- Actively managed
- Difficult to identify in true form
- Seeking price discrepancies, typically shorter-term, to generate outsized excess returns
- Seeking to be uncorrelated to traditional indices
- Heavy implementation costs
- Higher cost to access, e.g., “2 / 20” fee structure
- Prone to signal decay
Examples
- Multi-strategy programs with diversifying absolute return profile