podcast link including transcript: https://investresolve.com/podcasts/how-to-think-about-your-alternative-sleeve-in-the-context-of-getting-the-most-bang-for-your-buck-podcast/
Alternative premia need to be vol efficient; this may require leverage
- Alternative or factor premia will have attractive risk-adjusted return but low absolute return. Since they will represent a minority slice of our portfolio, we need to amplify the volatility with leverage so that it makes a noticeable difference to performance.
- Since market-neutral strategies can have bond-like volatility we need leverage to get bring that sleeve up to equal risk contribution with our vanilla asset classes.
Alternative premia need to be fee efficient. “bang for your buck” thinking
- Any discussion of fees need to be contextualized with the volatility. If 2 funds have the same fees but one fund is 1/2 the vol of the other, the low vol fund is not fee-efficient. In other words, you could allocate 1/2 as much money to the higher vol fund and have the same risk/return prospects as the low-vol fund but pay half the fee. In other words, when comparing fees, you must think in unit costs just as a quart of milk is cheaper than a gallon but not on a per ounce basis. You want to think of fees as per unit of volatility. For a deeper understanding of this see my post: Do Professional Investors Understand Fees?
Professional and future investors understand these concepts. They often prefer the 20 or 25% vol version of alt premia strategies rather than the 10% vol version. This allows them to make a smaller allocation to the strategy for the same exposure. Fee efficiency! The more you allocate to one strategy the less you have to allocate to other forms of premia, so being fee and vol efficient is important.
- What’s the value you are getting for the fee?
- What’s the expected return you are getting for the volatility?