(April 12, 2013) — CIOs must gain a better understanding of the difference between generating and capturing alpha, according to Liquidnet’s John Kelly.
Speaking at aiCIO‘s CIO Summit 2013 in New York, Kelly explained that sometimes the communications between fund managers and their traders were limiting the opportunities for alpha capturing.
“In thinking about the alpha process, we’d encourage you to talk to your fund manager to understand the relationship between the portfolio manager and the traders who capture the alpha,” he said.
“Portfolio managers often offer very specific instructions [about when to buy and sell], which isn’t the best way to contribute to the process.”
Kelly argued traders should be given more flexibility to make the best use of their skills to find and capture alpha returns.
Other speakers on the panel spoke of the difficulty in defining alpha in any one term, given the definitions of alpha differed depending on the pool of assets in question.
The importance of alpha generation also waxed and waned with the markets, delegates heard. Donna Snider, investment director at the Kresge Foundation, said that because of the makeup of her fund – a strategic philanthropic project based in Detroit, “finding downside alpha was actually more important than finding upside alpha, and we think more about underperformance in a down market than in up markets”.
“The market is pretty efficient so the first question I always ask is what makes something inefficient in order to generate alpha. We need to understand those inefficiencies better,” she added.
Related content: Donna Snider in aiCIO’s Forty Under Forty 2012