Hedge funds’ use of alternative beta, or managing volatile alternative investments, has grown by 30% this year, research shows.
Bfinance has released ‘The changing world alternative beta’ which suggests the growth is due to institutional investors increasingly pursuing more effective diversification.
The firm said that the attractiveness of alternative beta is that the sector is less commoditised than smart beta and correlation between managers is weak, even where similar risk premia are being targeted, due to significant implementation differences. For instance, combining multiple managers may prove beneficial to overall diversification.
Rather than focusing on the headline risk premia being targeted as seen with smart beta strategies, the selection and combination of providers can make a bigger difference to portfolio outcome.
Bfinance has found that the alternative beta product universe has evolved rapidly as asset managers push to take advantage of the rising appetite among pension funds, endowments and sovereign wealth funds to pursue effective and cost-effective diversification.
The strategy can be used in a variety of different ways. It can be used as an alternative to a hedge fund portfolio providing diversification or as an extension to smart beta or long-only factor based investing, where it provides new ways of adding depth in asset classes outside of equities exposure to particular premia without adding market risk.
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