An increasing number of traditional financial institutions are turning to events-based investment strategies to outperform low-cost passive index tracking funds.
According to Cowen’s global head of alternative equity strategies, Mark Kelly, traditional active managers are showing more interest in events-based investment strategies as a means to tackling continued fee pressure caused by the rise in the booming passive index tracker and exchange traded fund (ETFs) segments.
“The biggest challenge facing the buy-side right now is fee pressure that is brought in by passive management. It’s incredibly cheap for an investor nowadays to go and put money in a passive fund, which quite simply tracks an index or a sector or various ETFs,” he said.
“The other active option is to invest in the traditional asset managers who are stock picking. However, it’s very hard to stock pick and beat a market that’s going up 10-20% every year.”
Instead, Cowen promotes an alternative active method to beating low-cost passive strategies which is based primarily on specialist analysis of corporate behaviours that computers and passive trackers lack the human ability to detect. These could include mergers and acquisitions, people moves, rights issues, raising cash or the divestment of divisions or business silos.
“These moves mean the company that existed yesterday and for the previous ten years is different from the company that exists from today and for the next 10 years. If I try and use a computer or an index to back-test its behaviour versus its peers or versus the sector it doesn’t work,” added Kelly.
“If you can identify, as a human stock picker, that those stocks are doing something and are going to outperform because it’s a good thing you can buy, and if you can identify the stocks are going to underperform because it’s doing something negative you can sell those or be short in the hedge fund world and guess what? You’re going to, by definition, start outperforming that index.”
According to Kelly, traditional firms that do not specialise in this area have typically not taken advantage of behavioural anomalies because its outside of their skillset, instead choosing to go equal weight on a particular stock and leave it, forfeiting alpha-generating opportunities.
Cowen wants to encourage these asset managers to take advantage of these moves using the specialist analysis it provides, allowing them to access a portion of the alpha that was previously out of their reach.
Kelly noted a significant uptake in the last few years of traditional institutions keen to consider this method of investment as a strategy.
“We want to bring those styles of investing and those thought processes to the broader active management community. What we’re trying to say is don’t just let those hedge funds that specialise in this make all the profit out of it. With some help and advice and specialist expertise analysing it and trading it you can benefit from the differentiation in the P&L uplift that it brings,” he said.
“If I go back 20 years, there would have been a real aversion from the longer fund community to being overweight those names because they require a different type of analysis and there would be a perception that it’s outside of their natural skill set such as traditional equity analysis, valuing companies, price to sales, price to book etc., but they’re being forced to think more broadly because their investors are demanding more alpha.”