Why Long-Term Investors Love Beta | Chief Investment Officer

Is an investment’s performance the result of beta or alpha? The answer may depend on your time horizon.

The return interval over which risk is measured changes how investors view assets, according to research from finance professors Avraham Kamara (University of Washington), Robert Korajczyk (Northwestern University), Xiaoxia Lou (University of Delaware), and Ronnie Sadka (Boston College).

“What looks like systematic risk from the perspective of an investor with one investment horizon looks like abnormal returns to an investor with another horizon,” they argued.

Specifically, what looks like a beta premium to short-term investors may seem like alpha to long-term investors, the researchers found.

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For the study, the four business school professors studied a sample of listed stocks between August 1962 and December 2015, using price and return data from the Center of Research in Security Prices.

Using this sample, they constructed value-weighted portfolios, which they tested using a five-factor model over horizons of 1, 3, 6, 12, 24, 36, 48, and 60 months.

Liquidity beta had a significant premium at short horizons of three and six months, while market beta showed a significant premium between 6 and 12 months. For the value/growth factor, a substantial premium appeared at an intermediate horizon of two to three years.

Size and momentum factors did not exhibit significant premia at any time horizon.

“Liquidity risk measured using short-horizon data is priced, but liquidity risk measured using long horizons is not priced,” the authors wrote. “In contrast… market and value/growth risk measured at monthly horizons are not priced, while market risk measured using six-month and annual horizons and value/growth risk measured using 24- and 36-month horizons are priced.”

Using data from the Thomson-Reuters Institutional Holdings (13F) Database, the researchers found that long-term institutional investors as a whole “significantly overweight” assets with high intermediate-horizon exposures to value/growth risk and high short-horizon exposures to liquidity risk.

“Some factors that are risky from the perspective of short-run investors may not be so from the perspective of long-run investors, and vice versa,” the authors concluded. “Long-run investors appear to be the natural bearers of systematic risk.”

Read the full report, “Short-Horizon Beta or Long-Horizon Alpha?”

Hedge funds lost more capital in 2016 than in any year since 2009, according to research from eVestment.

Over the last 12 months, investors withdrew nearly $180 billion from hedge funds while allocating roughly $70 billion, for total net redemptions of $106 billion, the report said.

This was only the third time on record that withdrawals outnumbered new investments in hedge funds, according to eVestment. The negative flows came in a year when multiple prominent investors, including pension funds and insurers, announced decisions to cut their hedge fund allocations.

“Throughout 2016, investors clearly reacted to widespread underperformance from 2015, but at the same time showed a willingness to allocate to products which performed well,” the report stated.

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Despite outflows, the hedge fund industry still ended the year with slightly higher assets under management, as performance gains of $119.9 billion offset investor withdrawals.

According to another eVestment report, hedge funds on average returned 5.34% last year, with distressed funds performing the best.

Investors may have “missed the boat” on hedge funds in 2016, Peter Laurelli, the firm’s global head of research, wrote in an accompanying blog.

“Since many institutional decisions take a long time to make (and unmake), results from 2015 caused many institutions to back away from hedge funds,” he wrote. “While some high-profile hedge funds stumbled badly in 2015 and 2016, overall, all major hedge fund segments produced positive returns in 2016.”