By Bill Kelly, President & CEO of the CAIA Association.
W. H. Auden, the British-American poet, paid moving tribute to the departed in his poem Funeral Blues. With due respect and a touch of euphemism and paraphrase, he has given us the perfect opening bid for this essay:
It was my North, my South, my East, my West,
My working week and my Sunday rest,
My noon, my midnight, my talk, my song,
I thought that alpha would last forever: I was wrong.
CAIA Association was born 20 years ago out of the need for a higher degree of professionalism and education at a time when the Endowment Model was rapidly democratizing beyond the leafy campuses of eight U.S. Ivy League schools and their forefathers, the Ford Foundation and the Commonfund. The founding principle of this model was broad diversification, centered around a long-term orientation that better matched the long duration of an endowment’s liabilities against a wider set of risk/return exposures. The horizon was opened beyond public equity and debt, and this brought the likes of hedge funds, private equity, real estate, and infrastructure into the diversification mix…and alpha was there for the taking.
As reported by The Economist, there were just two dozen private equity general partners (globally) in the early 1980s, and venture capital—and even the concept of a hedge fund—were very nascent then too. If alpha was your thing, this was your time. Inefficiencies, complexities, and asymmetric information flow are the breeding ground for alpha, and it was a veritable feast for the long-term investor. In fact, it was All About Alpha, and CAIA Association even adopted that moniker as the naming convention for our house publication (no one blogged back then!).
The good times rolled, and outsize returns (absolute and risk-adjusted) persisted, and still do to some extent, in the rarified air of the top decile of the respective alternative investment performance universes. That party is not over but has gotten much more complicated. Efficiencies and scale are the hallmarks of beta, and the legendary Jack Bogle built an entire investment discipline around the concept of getting (and taking) what the broad market has to offer. Perhaps alpha is not truly dead within the alts space, but it has certainly moved to an altered state of a new reality.
The global financial crisis now dates back more than a dozen years. The accommodative central bankers brought forward liquidity (and valuations), all the while becoming the modern-day meme of the unattended garden hose. For good measure, they also pinned global rates to near-zero, leaving the return-seeking investor little choice but to jump into the deep end of the risk-on pool of opportunities. This started with public equities, but the iron gates of the clubby world of alternatives have been breached, too. In the latter case, the headlines talk of undifferentiated median returns, exceedingly wide cross-quartile performance dispersion, and mountains of dry powder.
Broad diversification, inclusive of the less liquid investment opportunities, remains alive and well in this new paradigm that we now call Portfolio for the Future™, but the beneficiaries— ultimately all of us—have spoken too. They want a fiduciary mindset and sustainable execution that thinks about the importance of that double bottom line; elusive in the short-term, but more sharply focused through the lens of long-term investment. Beneficiaries will also want and need broad-based access to the private markets, which have become the undisputed leader in capital formation and value creation. These same investors equally want to be more actively engaged across ever-broadening beneficiary expectations and outcomes, as the mindset shifts toward socially centered outcomes. The stakes are high as we move from products to solutions that are more values attentive and will need to go well beyond the simple action of weaponizing a proxy vote in the public market arena.
This is all happening amid a decentralized finance backdrop that is barely being held back by turf-protecting institutional edifices and entrenched regulators. When that wall breaks there will be disruption that will produce efficiencies via operational alpha. This new paradigm will usher in more transparency and democratized access for all investors, who expect and deserve the ultimate in professionalism and trust.
If you enjoyed this article, be sure to read CAIA Association’s new report, The Portfolio of the Future.
About the Author:
William (Bill) J. Kelly is the President & CEO of the CAIA Association. Bill has been a frequent industry speaker, writer, and commentator on alternative investment topics around the world since taking the leadership role at the CAIA Association in January, 2014. Previously, Bill was the CEO of Boston Partners and one of seven founding partners of the predecessor firm, Boston Partners Asset Management which, prior to a majority interest being sold to Robeco Group in Rotterdam in 2002, was an employee-owned firm. Bill’s career in the institutional asset management space spans over 30 years where he gained extensive managerial experience through successive CFO, COO and CEO roles.
In addition to his current role, Bill is a tireless advocate for shareholder protection and investor education and is currently the Chairman and lead independent director for the Boston Partners Trust Company. He has previously served as an independent director and audit committee chair for ’40 Act Mutual Funds and other financial services firms. He is also currently an Advisory Board Member of the Certified Investment Fund Director Institute which strives to bring the highest levels of professionalism and governance to independent fund directors around the world. A member of the board of the CAIA Association, Bill also represents CAIA in similar capacities via their global partnerships with other associations and global regulators. Bill began his career as an accountant with PwC and is a designated Audit Committee Financial Expert in accordance with SEC rules. Follow Bill Kelly on Twitter @CAIA_BillKelly