ART IS ALPHA

Posted on in Editorial by Josh

When the financial industry expands, generating greater returns in the equity market is typically less difficult. For example, when deregulations hit the United States economy in the past, the markets soared. In the early 2000s, the United States witnessed unprecedented deregulation and it was difficult choosing an investment strategy that didn’t outperform expectations. In times like these, markets are easy to beat. Therefore, active fund managers set performance benchmarks that go above and beyond market indices, such as the S&P 500. The excess return of a fund relative to an elevated benchmark is called the fund’s alpha.

In the years preceding the financial crisis, record bull markets were shattered by active fund managers, who utilized a Brainless Alpha strategy. This strategy relies on mechanical investing guided by quantitative analytics. Ronald Surz, a hedge fund analyst and pension fund manager, explains that “the appeal of Brainless Alpha is that no one has to think. The problem is that Brainless Alpha goes too far in its simplicity. Beating the market is much more complicated than tilts or big bets. Despite the evidence that active managers fail to beat their passive index alternatives, investors have not given up on alpha -- they still want to beat the market, but If we really want alpha, someone will have to think harder.”

Director of research at Portfolio123, Marc Gerstein, took a survey of several equity databases and discovered the following:

- Out of 8,428 U.S. open-end equity mutual funds, only 40% (3,363) have succeeded in generating three-year alpha above zero.

- Of those, 24% (2,038) generated alphas at an annual rate above 1%.

- Among U.S. Equity ETFs that use a "Quant Model" method, only 14 out of 109 successfully generated positive five-year alpha.

Put simply, the majority of funds seeking alpha fail to do so. The stock market is a zero-sum game, where it ultimately comes down to being average. As more managers adopt the same Brainless Alpha strategy, the entire lot starts performing average relative to the market. The basic dynamics of the stock market make it impossible to achieve above average results the same way over and over again. In other words, a bull market is a bad market. This explains why a select group of fund managers are reacting to the most recent wave of deregulations, or growth opportunity, in a completely different way. Innovative managers are targeting alternative asset classes in order to outperform the equity market. Yesterday’s alpha is failing. So, these managers are developing a new wave of strategies that go beyond traditional markets.

The rising class of alternative investment funds operate on the premise of human intellect, proprietary data, and innovative technology. These three factors are critical to creating value in today’s economy. Capturing the benefits of alternatives is becoming standard practice. PwC predicts that alternative investments will capture $15.3 trillion in AUM by 2020. Looking at the 5 most common alternative investments,art alone has grown to account for nearly 17% of high net worth individuals’ investments in the years leading up to 2014 (According to the 2015 Capgemini World Wealth Report). New technology based on art world expertise, big data, and innovative analytics allow individuals to invest in the historically exclusive art market. Arthena’s art funds capture value by penetrating the highest growth areas of the market, creating alpha in art.

E-mail concierge@arthena.com to start investing in alternatives today.

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