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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
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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!
7/25/2019 Appleby Capital_Death of Alpha Presentation - Q1 2014
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The State of Industry
Market Environment/Trends
*'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 $T returns have fallen dramatically althou"h still providin" ade'uate
#I)s
out of the last 10 years, hed"e funds have underperformed the ?@/ 500 /*
returns have not een much etter
n avera"e =53 of all e'uity mana"ers underperform the mar!et
7/25/2019 Appleby Capital_Death of Alpha Presentation - Q1 2014
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IPOs are one and so !s the "o##ensurate Alpha
Market Environment/Trends
4
CONFIDENTIAL
Companies cant%row enou%hor%anically (ac)uisitions areimperati$e
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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
7/25/2019 Appleby Capital_Death of Alpha Presentation - Q1 2014
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?use'uent /erformance of Top 253 of D? *'uity $unds- &s of %ecemer E1, 2010
/ource0 Dimensional Funds and C1/# /ur$i$or23ias2Free 4/ 5utual Fund Data.ase6
Top ,uart!le-./ Funds
,uart!le -
,uart!le 0
1otto# ,uart!le
+,,7(+,,8
Top
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The Fa!lure of A"t!(e *anae#ent$ 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 $ailedto utperform (enchmar!
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The Fa!lure of A"t!(e *anae#ent$ Per"entae of a"t!(epu2l!"
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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
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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 $und Mar!et in F( 2.23 A&G#
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ETF E4h!2!t )ons!stent Asset roCth$ The Pass!(e
Veh!"le
Market Environment/Trends
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#
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Conclusions
2
CONFIDENTIAL
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%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 $idelity will have a decade
of mar!et share "ains
CONFIDENTIAL
3
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Alpha !s 6ead$ 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
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Alpha !s 6ead$ Te"hnoloy and NeC *odels to F!ll Vo!d
Market Environment/Trends
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