Like Bo Jackson and others, Angelo Calvello is a “multi-sport athlete”.  The early and outspoken advocate of portable alpha and originator of the term “alpha-centric” has now established his thought leadership credentials in the emerging field of green investing.  He is the author of the forthcoming book “Environmental Alpha” (Wiley: 2009).

Calvello was one of several speakers addressing a standing room only crowd of nearly 400 people at Bloomberg’s New York headquarters at the inaugural CAIA Green Investing Symposium (organized by the New York chapter of the CAIA Association, and co-sponsored by the New York Society of Securities Analysts, the Connecticut Hedge Fund Association, and the Yale Center for Business and the Environment).

More than just a social issue, he describes climate change as the “mother of all investment themes.” In a refreshing departure from the usual (albeit important) socially-grounded view of climate change, he remained agnostic with regard to even the dirtiest of energy technologies (e.g. coal).  Instead, he focused his remarks today on how to generate returns given the realities of climate change.

The drivers of those returns, according to Calvello, can be categorized as science, economics, policy, and technology.  He divides “environmental investing” into 5 categories: clean technology, sustainable property, LULUCF (Land-Use, Land-Use Change, and Forestry), carbon, and water (although he acknowledges that water does not have a direct effect on green house gasses).

So what is environmental alpha?  Although environmental investing may show potential for outsized returns in the future, it could all just be environmental beta.  But Calvello argues that such a new field exhibits inevitable market inefficiencies.  He points to the complex choice of a wind farm location as an example of the type of investment that relies on emerging and uncommon knowledge.

Reducing dirty energy use by 50% before 2050 (as global policy makers have discussed) would require about $45 trillion dollars – or about 1% of GDP per year.  And that, according to Calvello is the heart of the investment opportunity.

“Backburner” no more

Rob McAndrew fondly recalls the heady days of 2006 and 2007 when carbon trading was the cat’s meow.  But as he said today, “in the midst of a global economic downturn, it’s no surprise that carbon trading has taken a back burner.”

But McAndrew, the SVP of the Chicago Climate Exchange, is bullish again.  He says his email is once again full of people wanting to know more about how to make money in the burgeoning market for carbon credits.  He listed off a series of trading strategies used by players in this space.

With 35 billion tons of carbon being dumped into the atmosphere every year, he says that the global market for carbon credits could reach a few trillion dollars by 2020.

If 2009’s carbon auctions are any indication of the future direction of this market, this is no pipe dream.  In June, the US Congress passed the “American Clean Energy and Security Act” that established the cap and trade system of carbon off-set credits.  And with the EPA estimating that it will cost between $13 and $20 per metrics tonne to pollute, carbon trading looks set to go from “backburner” to “boiling over.”

In advance of carbon emissions becoming a tangible cost, some institutional investors have already begun to calculate the carbon footprint of their holdings (e.g. Sweden’s AP2 pension fund).

Chile: The next Saudi Arabia?

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We are pleased to present another commentary from the man who first coined the term “alpha-centric”, Angelo Calvello.  Today, Calvello uses examples such as Man Investments and BGI to argue that there is more than one way for asset managers to become truly alpha-centric.

Special to AllAboutAlpha.com by: Angelo Calvello, Ph.D.

Investors, faced with funding shortfalls and stricter accounting regulations, are demanding innovative ways of achieving absolute returns.  In the process, they are challenging the asset management industry to break down artificial barriers and constraints and consider solutions to problems we did not know existed a year or two ago. 

In many cases, these investors are offering those of us who can provide demonstrable value the opportunity to transform ourselves from vendors into partners who share their vision. The common denominator is the concerted focus on finding and generating alpha. The defining challenge for the asset management industry is to create and adopt business models and mindsets that will allow us to succeed in this new alpha-centric world.

Multiple Sources

Institutional investors are already seeking investment solutions beyond narrow, single-source portable alpha strategies.  They are exploring and implementing multi-alpha solutions that provide exposure to multiple asset classes at the portfolio level.

Because alpha is scarce, transitory and capacity-constrained, these solutions need to be structured flexibly so that alpha sources can be changed as they reach capacity or lose their edge. These solutions must also be structured to provide not just the desired return and volatility targets, but consistent positive returns while avoiding large losses.

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Angelo Calvello

Former Executive VP, North America, Man Investments.  Six years with State Street Global Advisors where he helped build the firm’s portable alpha and hedge fund businesses.

Relevant Postings (AllAboutAlpha.com)

Angelo Calvello has been around the alpha-centric investing world longer than almost anyone.  In fact according to our research, he actually coined the term “alpha-centric” investing.  In a guest posting today, he applies this thinking to hedge fund fees.  And what he concludes will surely surprise many.  

Special to AllAboutAlpha.com by: Angelo A. Calvello, Ph.D. 

I recently attended a conference on 130/30 strategies.  The discussion eventually and inevitably drifted to the well worn but poorly understood topic of hedge fund fees and more specifically the inevitable compression of those charges. 

It is a debate founded on the belief that hedge fund fees are simply too high, although it is not clear what yardstick is being used to support this conclusions. Hedge fund fees could be compared to those charged by traditional long-only managers, but this would assume that fees charged for ‘active’ long only management fairly represent the value added by these strategies.  This, of course, is questionable. 

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Regular readers may remember our survey of attitudes toward 130/30 funds last August.  Since that survey, several others (e.g. Merrill Lynch, Vodia Group) have come up with similar numbers – about 15-17% of institutions actively investing in 130/30 and another 25-30% considering investments in the next 12 months.  Today, Kathryn Wilkens tells us of a recent survey of practitioners (members of the Chartered Alternative Investment Analyst Association) on this topic in our regular installment of “Alternative Viewpoints”.

A true advocate of alternative investments herself, Kathryn Wilkens received a Ph.D. in finance at the University of Massachusetts in 1998, and received a Center for International Securities and Derivatives Markets (CISDM) fellowship in 1997.  She was on the CAIAA’s advisory board from the program’s inception in 2002 though 2005, and is now the CAIAA’s Director of Curriculum.

Alternative Viewpoints – powered by CAIA

Special to AllAboutAlpha.com by: Kathryn Wilkens, Ph.D., CAIA, Director of Curriculum, the Chartered Alternative Investment Analyst Association, Amherst, Massachusetts

Last month, 440 CAIA members responded to a survey on 130/30 funds and I presented the results at Terrapinn’s 130/30 conference in Santa Monica.  The survey questions were structured around two main themes frequently discussed here at AllAboutAlpha.com:

• What is the most appropriate benchmark for 130/30 funds?
• What best describes your opinion about 130/30 funds?

When I posed the first question to the attendees at the Terrapinn conference, all but one responded that a standard long-only equity index such as the S&P 500 index or the Russell 2000 is the appropriate benchmark for 130/30 funds.  Yet Dow Jones, Credit Suisse, and S&P have all recently developed 130/30 indices (see related AAA postings Dow Jones joins the 130/30 Index Parade, S&P follows CS into 130/30 index business, 130/30 Indices: True indices or like playing chess against a computer?)  Two of these indices are classified as a type of Strategy Index with another being a so-called fundamental index.

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Those unfamiliar with the inner workings of a parliamentary democracy always find the hoots and hollers accompanying parliamentary debate to be a source of great entertainment.  Every week in countries around the world various prime ministers subject themselves to intense, direct and sometimes vicious attack.  Some countries (such as Canada) have laws actually protecting legislators from libel suits for whatever barb they throw at their fellow parliamentarians while inside the house.

On Thursday, the Canadian chapter of AIMA, the Alternative Investment Management Association held its annual parliamentary-style debate in Toronto.  This year’s resolution before the house: “1X0/X0 hybrid hedge fund strategies are simply a marketing fad.”  With more than a passing interest in 1X0/X0 strategies, we were sure to show up for the fireworks.

“Speaker of the House”, AIMA Canada Vice Chair Tris Lett was tasked with maintaining decorum in the oak-paneled main dining room of Toronto’s tony National Club (think, the club from the movie Trading Places).  Clearly familiar with the mayhem of parliamentary debate, he warned debaters only against physical attacks and the use of foreign objects (a la the Taiwanese parliament).

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Day one of this event focused on portable alpha, while day two (Thursday) will focus on 130/30.  Trying to draw a link between the two days has been left up to Alpha Male as moderator of a panel called “A side by side look at portable alpha and short extension strategies”.  Wish me luck.

Blazing a trail for me today were several regular portable alpha commentators including the following…

Yoshiki Ohmura, head of portable alpha strategies at GAM, told the crowd here that portable alpha strategies don’t actually overlay alpha onto beta, but overlay beta onto an alpha source.  While it may sound pedantic, this interpretation supports the view that portable alpha is as much about betas as it is about alphas (as discussed above).  In addition, he said that alpha often contains extranious betas (what other, more saucy commentators have called dirty beta).

Man Investments’ Angelo Calvello led an interesting panel on whether portable alpha had lived up to the hype.  A fierce advocate of alpha-centric investing, Calvello argued that portable alpha is anything but a fad.  While bristling at the term paradigm shift, he did pronounce to the audience that shift happens!.

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Visitors to our Events Section may have noticed that many of the world’s leading conferences on portable alpha, 130/30 and hedge fund replication are organized by Terrapinn or one of its subsidiaries.  Terrapinn’s events in this area have featured industry leaders such as Harry Kat, Bill Fung, David Hsieh, Rob Arnott, Thomas Schneeweis, Nassim Taleb, Laurence Seigel, Paul Wilmott, Angelo Calvello and others.

So we recently jumped at the opportunity to become the “official blog partner” of Terrapinn’s line-up of alpha-centric events from Toronto to Tokyo and from Sydney to Santa Monica.

One of the first projects to be undertaken jointly by AllAboutAlpha.com and Terrapinn is a survey of attitudes toward 130/30 investing.  We encourage you to take this brief 5 minute survey before August 24th.  In exchange for your time, you can expect to receive the summary results along with a reduced fee for a number of Terrapinn’s North American events.

As this partnership takes shape, you can also expect to hear from members of Terrapinn’s excellent speaker line-ups here at AllAboutAlpha.com in the form of guest postings and special contributions.

We hope you will agree that this partnership represents the perfect marriage between a physical community (a conference) and a virtual community (a blog).

While nearly all institutional investors are now clear about the benefits of portable alpha, many are still put off by its often complex mechanics.  Unlike a simple active long-only mandate, a portable alpha strategy can often involve multiple accounts, the assumption of counterparty risk when using swaps for beta exposure, and cash management and rebalancing due to collateral requirements, not to mention new reporting and analytical requirements.  These challenges – amplified by the headline risk of potentially dropping the ball somewhere along the line – have put the breaks on portable alpha programs at many institutions.  This, even as these investors readily acknowledge the theoretical advantages of such a strategy.

So says Angelo Calvello of Man Investments in an “institutional investor only” white paper released earlier this year.  Calvello is one of the instigators of the alpha-centric revolution, using the term “alpha-centric” as far back as 2005 (see related posting).  Acknowledging the operational challenges inherent in a relatively complex strategy such as portable alpha, he now proposes a “bundled” solution that wraps the various components of portable alpha into one entity, such as a special purpose vehicle or a fund).  According to Calvello, this would dramatically simplify the lives of pensions and endowments that are current reticent about diving into portable alpha.

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As regular readers will know, we’ve used the somewhat esoteric term “alpha-centric” to describe everything from portable alpha to 1X0/X0 on this website.  Sure, it’s a bit awkward, but ”portable alpha” is just one strategy that is enabled by explicitly identifying and manipulating the various embedded components of actively-managed funds (either long-only or hedge funds).

We used the term to describe Bridgewater Associates, one of firms on the vanguard of alpha-centric investing, when they asked their clients to switch to portable alpha last October:

“Like us at AllAboutAlpha.com, CEO Ray Dalio believes alpha-centric investing represents a fundamental re-organization of the investment industry.”

Despite raising the warning flag about hedge fund leverage, Dalio himself also used the term “alpha-centric” recently to describe Bridgewater’s philosophie de la vie.  As Money Management, an Australian magazine, reported a couple of weeks ago:

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Location: New York
Dates: November 7-9, 2007
Organized By: Terrapinn

In a great example of real-time market response, organizers of “Portable Alpha USA” have recently added “130/30″ to the mix. While these two topics might appear to be slightly different species, we argue that they are part of the same genus: alpha-centrus investingae. Portable Alpha advocates would have investors lever their beta (keeping it at the same level) and use the capital to allocate to an alpha source. Similarly, 130/30 also involves alpha/beta separation, but keeps the beta 100% funded and effectively allocates to an “unfunded” market neutral alpha source (well, at least not truly “unfunded” since the beta source essentially acts as collateral for taking on the short positions).

Some of our favorites will be there: Harvard’s Randy Cohen (related posting), Prudential’s Michael Lillard (related posting), Man Investment’s Angelo Calvello (related posting), Casey Quirk’s Jeb Dogget (related posting) and Wilshire’s Jim Dunn (related posting).

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This is the final dispatch from Alpha Male’s road trip to Institutional Investor’s Alpha Generation Forum in New York last week.

I’d be the first to admit alpha centric investing (portable alpha, active overlays, 1X0/X0 strategies, hedge funds, ETFs etc.) can be brutally boring sometimes.

But to their credit, the speakers at this event kept us all awake without need for intravenous caffeine drips or too many of those jam-filled conference pastries. I found three of the speakers to be particularly engaging – mainly due to their enthusiasm about what they see as a fundamental shift toward alpha-centric investing: Mark Baumgartner, Executive Director of Morgan Stanley’s portable alpha group, Angelo Calvello, the newly-minted North American EVP at Man Investments, and Laurence Siegel, Research Director for the Investment Division of the Ford Foundation.

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Organizer: Institutional Investor
Date: December 7, 2006
Location: New York

Apparently ii’s market research department has determined that an event featuring the trifecta of today’s hot investing topics will attract the broadest audience possible.  This event bills itself as “New Models for Liability Driven Investing, 130-30 Strategies, Portable Alpha & More”.  That’s an audacious goal for one day.  But kudos to ii for making the attempt.    

Says the programme:

“Portable alpha and alpha beta separation have generated a great deal of buzz, but the investment management community still struggles with the operational challenges – the nuts and bolts – of implementation. Hedge funds and money managers consider the relative merits of rolling out a turn-key alpha strategy, or customizing plans on a case-by-case basis. And there is a palpable frustration with the unquestioned use of existing benchmarks as measures of success.”

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By: Angelo A. Calvello Ph.D., State Street Global Investors
Published: October 15, 2003

Excerpts: 

The new paradigm rejects total return as the measure of a strategy’s worth. It instead holds steadfast to the principle that any strategy’s total return can be divided into a market return and (ideally) a net excess return. The market return component is quantified as beta and the excess return component is quantified as alpha. What is of real value is the strategy’s ability to consistently generate alpha.

The idea of portable alpha has been around for over twenty-five years, with Bridgewater, SSI, and First Quadrant being early (and persistent) proponents. Numerous institutional investors have implemented portable alpha strategies into their portfolios. Beyond the nascent demand for portable alpha strategies among some of State Street Global Advisors’ (SSgA) clients there are additional signs that this paradigm shift is occurring.

“I make presentations to pension plans with a half a dozen active managers in style and market capitalization boxes. If these funds separated their alpha and beta, they would find risks and returns are nearly all beta. All they have is an expensive index fund.

This separation and recombination of beta and alpha is only one of the fundamental principles of the new investment paradigm. The other, the search for alpha as separate and apart from an institution’s policy asset allocation, is equally primordial. The paradigm shift is coming. [As Lee Thomas, Chief Global Strategist at PIMCO, says], ‘My sense is that the world is pregnant for a revolution in investment management. It feels like 1935, when people knew that the current macroeconomic thinking didn’t work and then Keynes published his General Theory. The separation of alpha and beta is similarly powerful.’

UPDATE: Calvello has since moved to Man Investments and unfortunately this article has been removed from the SSGA website.

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