June 2016

A Hedge Fund Manager’s View on Liquid Alternatives

Included below is an excerpt of Andrew Beer’s article in WealthManagement.com: There’s something amiss in the liquid alts space. After years of stellar growth, adoption of liquid alternatives at wirehouses ground to a halt last year, according to a recent study by the Money Management Institute and Dover Financial Research called Distribution of Alternative Investments through Wirehouses (2016). Consequently, despite growing risks in 60/40 portfolios, most retail investors are significantly underinvested relative to target allocations. On top of this, some big players that were early adopters of liquid alternatives are rethinking that move strategically. “Generation one” of liquid alts had …

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Smart Money Insights: Weekly Brief June 29

Brexit Fallout: Financial The financial market’s response to the Brexit decision was swift and dramatic—and the aftermath continues. In the first two days following the referendum, the Stoxx 600 index fell nearly -11% while the S&P 500 declined -5.3%. The pound sterling lost -11.1% against the U.S. dollar and -14.6% against the Japanese yen. Meanwhile, traditional haven assets such as gold and the 10Yr Treasury rallied 5.4% and 1.9% respectively. Two days following the referendum, Fitch and S&P cut the U.K.’s credit rating to AA while Moody’s lowered the U.K.’s credit rating outlook to negative. Bond investor Bill Gross anticipates …

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The Trouble with Alpha: Part I

Investors equate “alpha” to outperformance.  A high alpha fund presumably delivers substantial excess returns relative to its benchmark. True alpha is short-hand for manager skill.  Statistically, alpha simply is the result of a linear regression between two return streams. The regression finds the straight line (ordinary least squares) that best fits the time series. Visually, beta is the slope of the line and alpha is where it crosses the vertical axis. The calculation was designed to uncover managers who outperform simply by taking on more risk. A manager who leverages to outperform the S&P in an up year will show …

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Institutional Investor: A Hedge Fund Adviser’s Open Letter to Pension Trustees

Included below is an excerpt of Andrew Beer’s article published on June 20, 2016: It’s hard to pick up a financial newspaper these days without seeing some sort of piece on a purported hedge fund disaster.  There are a number of reasons, I surmise, that this is the case: The “rich guy gets hammered” trope sells papers.  For every fund down 20 percent, a different one is up 20 percent.  There’s a cottage industry of people who run around trying to find the next calamity. High fees − justifiably − lead to high expectations. When you pay 2-and-20, you should …

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Smart Money Insights: Weekly Brief June 20

The Collapse of Visium At its peak, Visium Asset Management oversaw $8BN across five hedge funds and a mutual fund focused largely on the health care sector. The firm recently announced that it is liquidating four of its funds and selling another to AllianceBernstein. The liquidations followed the arrest of a high-profile portfolio manager at Visium for insider trading. Visium’s flagship Balanced Fund was down approximately -9.3% YTD through May and the firm has been hit with a wave of redemptions following the disclosure of the insider trading investigation. Meanwhile, investors will need to wait several months for their capital …

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The Rise of Populism and the Fall of Economies

Recent election cycles in the U.S. and Europe have seen the ascendance of political parties whose platforms are significantly shaped by populist initiatives. Underlining many such initiatives is a preoccupation with immigration. Earlier today the Wall Street Journal reported that 40% of Brexit supporters indicated that immigration was their primary reason for backing the Leave campaign. Although the U.K. is not party to the Schengen agreement, which enables passport-free travel across member states, eurosceptics have found a strong source of support among those fearful of spillover from the ongoing migrant crisis. In the U.S., wage stagnation and a preoccupation with …

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Financial Times: The Hedge Fund Fee Structure Consumes 80% of Alpha

Investors bear the risks and managers reap the rewards, says Beachhead’s Andrew Beer. The average hedge fund earns 1.67 per cent in management fees and is paid 18 per cent of investment profits annually. Over the past ten years, investors paid away half of pre-fee returns. Even more troubling is the fact that fees consumed 80 per cent of alpha, the active return on an investment. Yes, the industry still generates a lot of alpha, but it goes to the managers, not investors. How did we end up in a world where investors bear the risks and managers reap the …

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Smart Money Insights: Weekly Brief June 14

10 Days Until Brexit? In an earlier post, we explored the potential fallout of a Brexit and the shifting fortunes of the Leave camp. A new poll gives Leave a 19 point advantage (52% vs 33%), while UK bookmakers are pricing in a somewhat lower chance of Brexit—approximately 40%. Bookmakers are continuously revising upwards their estimates of a Brexit and bookmaker William Hill indicated in an interview with Business Insider that Leave could overtake Remain in betting by the weekend. Meanwhile, a new report from Morgan Stanley forecasts a -15% drop in European equities and a -7.8% drop in the …

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Why a ‘Replication’ Strategy Trumps Liquid Alt Funds

Catch Andrew Beer interviewed on TheStreet. The liquid alternatives movement is trying to bring hedge fund strategies to ordinary investors. Unfortunately, performance has been subpar for the majority of liquid alternative funds and the fees are still relatively high compared to the average mutual fund. Andrew Beer, managing partner at Beachhead Capital Management, said a ‘replication strategy’ is the better option. ‘The idea is simple: figure out how hedge funds are invested, and copy it,’ said Beer, who also refers to his replication strategy as ‘Dynamic Beta’. Beer said even for sophisticated investors, it is difficult to figure out exactly …

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Brexit in 10 Days?

A new poll from the Bruges Group gives the Leave camp a 19 point lead over Remain. According to the poll, 52% of respondents supported a Brexit, while only 33% wished to remain in the EU and 15% were undecided. A decisive victory for Leave is within grasp; even if all of the undecided Britons voted to Remain (an unlikely outcome), Leave would still come out ahead. Adding to the confusion, UK bookmakers are pricing in a substantially lower risk of a Brexit; for instance, bookmakers Ladbrokes and Coral are pricing in a 36% chance of a Brexit. Given the …

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