appleby capital_death of alpha presentation - q1 2014

7/25/2019 Appleby Capital_Death of Alpha Presentation - Q1 2014

1/15

Confidential

The Death of Alpha and its

Impact on Wall Street

HOFSTRAUNIVERSITY

May 1, 2014


2/15

What happened to Alpha?

Market Environment/Trends

I. The Internet provided the low-cost communications tool for companies to

disseminate information to investors simultaneously. The traditional role ofintermediary for the investment an!s was "reatly diminished if not moved to

osolescence

II. #e"ulation $air %isclosure enacted in &u"ust 2000, re'uired all pulicly tradedcompanies to disclose material information to all investors at the same time. I()s

and their analysts no lon"er could receive and disseminate selective information

III. *lectronic Tradin" less ovious ut e'ually onerous. Most tradin" is now doneelectronically and when comined with the increased fra"mentation of e+ecution

destinations and the lac! of natural order flow ecause there is no research call,

has put the pricin" pressure in the hands of the uy-side.

I. I/)s their numer and their upside potential are virtually non-e+istent. The I/calendar, lon" a material alpha "enerator, has fallen to ust 143 of the numer

etween 15-2000, and still only 263 of the more normal 170-14 period. *venwhen there are deals, the private e'uity firms are now the 8customer9 not the

institutions. &s a result, the I/ discount of 153, has een lar"ely eliminated and

is ein" asored y the sellin" shareholders

2

CONFIDENTIAL

Why shouldinstitutions paywall street if theycant maemoney!


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The State of Industry


*'uity &% down 203 in last 2 years you don)t

need to see another chart on this

*'uity (ro!era"e #evenues are down 403 :;:,

in $T returns have fallen dramatically althou"h still providin" ade'uate

#I)s

out of the last 10 years, hed"e funds have underperformed the ?@/ 500 /*

returns have not een much etter

n avera"e =53 of all e'uity mana"ers underperform the mar!et


4/15

IPOs are one and so !s the "o##ensurate Alpha


4

CONFIDENTIAL

Companies cant%row enou%hor%anically (ac)uisitions areimperati$e


5/15

Fa#a and Fren"h$ %&u"' (ersus S'!ll !n the )ross Se"t!on of *utual

Fund Returns+

Professional Managers Underperform

5

CONFIDENTIAL

8$or the period 174 to 2006, when the A#?/ dataase is relatively free of

iases, mutual fund investors in a""re"ate "et net returns that underperform

A&/M, three-factor, and four-factor enchmar!s y aout the costs in e+pense

ratios.9

8Bhy stron"er results for 1=5 to 2002 versus 174 to 2006C ne story is that

in olden times there were fewer funds and a lar"er percenta"e of mana"ers withs!ill sufficient s!ill to cover costs. ver time the s!illed mana"ers lost their ed"e

or went on to more lucrative pursuits for e+ample, hed"efunds.9

*ournal of Economics& +,,-

No.el awardstudies supportlac of alpha


6/15

?use'uent /erformance of Top 253 of D? *'uity $unds- &s of %ecemer E1, 2010

/ource0 Dimensional Funds and C1/# /ur$i$or23ias2Free 4/ 5utual Fund Data.ase6

Top ,uart!le-./ Funds

,uart!le -

,uart!le 0

1otto# ,uart!le

+,,7(+,,8

Top


7/15

The Fa!lure of A"t!(e *anae#ent$ Per"entae of a"t!(epu2l!" e3u!ty funds that fa!led to 2eat the !nde4 5 F!(e Years as of6e"e#2er -78-

7

Source: Standard & Poors Indices Versus Active Funds Scorecard, year-end 2012. Index used for co!arison: "S #ar$e %a!S&P '00 Index( "S )id %a!S&P )id%a! *00 Index( "S Sa++ %a!S&P Sa++%a! 00 Index( +oa+

FundsS&P +oa+ 1200 Index( Internationa+S&P /00 Index( Internationa+ Sa++S&P or+d ex. "S Sa++%a! Index( er$in$ )aretsS&P IF%I %o!osite. 3ata for t4e SPIVA study is fro t4e %5SP Survivor-6ias-Free "S )utua+Fund 3ataase.

03

103

203

E03

403

503

603

=03

703

03

1003

=53

03

7E3

623

=43

213

9:;

E3u!ty Fund )ateory

3 of &ctive $unds That $ailedto utperform (enchmar!


8/15

The Fa!lure of A"t!(e *anae#ent$ Per"entae of a"t!(epu2l!"


9/15

Hede Funds$ Only th!n )ons!stent !s Under5perfor#an"e

9

C#7@7,6+

= out of the last 87 years> hede

funds ha(e underperfor#ed the SP@77 only #eetB2eat Cas -77.

True Profess!onal !n(estors 'neC*adoD Cas "heat!n

Paulson Ad(antae Plus Fund doCn/9; !n -788> and 8=; !n -78-

SA) %no "o##ent+

alleon !n!t!ally 2ene


10/15

Wh!le E3u!ty *utual Funds Stanate 6esp!te R!se !n*ar'et

!

CONFIDENTIAL

Without alpha&returns ha$ela%%ed as hasasset %rowth

ETF *ar'et !n 1!ll!ons E3u!ty Funds

*'uity Mutual $und Mar!et in F( 2.23 A&G#


11/15

ETF E4h!2!t )ons!stent Asset roCth$ The Pass!(e

Veh!"le


CONFIDENTIAL

*T$)s ust received maor #e"ulatory Aatalyst - 4072 and 404a

5, went into effect late last year - will re'uire all plan sponsors,

fiduciaries, and trustees normally all the same people to "ather and

present all fee information and to accept fiduciary liaility

1e%ulation willsoon acceleratethis %rowth

7

-77

/77

:77

.77

8>777

8>-77

8>/77

*T$ Mar!et in F( 223 A&G#


12/15

Conclusions

2

CONFIDENTIAL


13/15

%Alpha !s 6ead+ )on"lus!ons$ A"t!(e !s o!n Pass!(e

Market Conclusions

/rior to 2002, many lar"e mutual fund comple+es and hed"e funds e+hiited mar!et

eatin" returns as investment an!s and other data companies provided alpha

Information advanta"e "oin" to scale payers

I/)s and their 153-253 discounts to mar!et padded returns

How after a decade of underperformance, Mutual and >ed"e $und mana"ers will

continue to suffer

Bill e+perience si"nificant asset erosion

Maor traditional asset mana"ers 8wire houses9 without alpha and with hi"h fee

models are also losin" assets to

/assive Investin" Models) maor eneficiaries includin"

*T$s

Independent advisors, technolo"y and service providers to this channel

&nd Austodians li!e T% &meritrade, ?chwa and $idelity will have a decade

of mar!et share "ains

CONFIDENTIAL

3


14/15

Alpha !s 6ead$ Is Wall Street Ne4t?

Market Conclusions

Investment (an!s must find ways to remain relevant;valuale

Bill lead them to an outsourced technolo"y solution inhouse uild is too

ris!y and costly -

*ven further employment attrition and consolidationthis is e"innin" to help

those left standin"

Institutions continue to loo! for ways to ypass I(s for e+ecution, research

and even I/)s

The economy will eventually improve leadin" to risin" mar!ets

Traditional ro!era"e models to "reatly enefit from increased tradin" andhi"her interest rates ut this will e a 8false positive9

Investment an!s and institutional asset mana"ers face severe e+pense constraintand cut their internal technolo"y uild;spend in favor of outsourcin"

and Mana"ed ?ervices ta!es hold as optimal solution for cost and technolo"y

CONFIDENTIAL

4


15/15

Alpha !s 6ead$ Te"hnoloy and NeC *odels to F!ll Vo!d


Technolo"y differentiates in new world order

>$T, where alpha still e+ists lives on only real threat is re"ulatory

%ar! /ools also have re"ulatory threat in e'uities fi+ed income will soon enefitfrom this model thou"h this will not e "ood for employment

Hew Models li!ely to ta!e lar"e share of &DM in retail channel

Aan lead to consistent outsiJed "ains

Maor focus on plannin", optimiJin" and lowerin" e+pense urden Aloud Aomputin";(i" %ata will drive innovation and some alpha

& form of Arowdsourcin" or other evolvin" mar!et models can displace /* andBall ?treet comple+es

CONFIDENTIAL

appleby capital_death of alpha presentation - q1 2014

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