Investment Approaches: Active versus Passive Strategies
In the world of investment, the ongoing shift towards passive management and the efficiency of markets pose significant challenges for active equity hedge fund managers. This shift, as well as high competition, market pricing, costs, and fees, difficulty in repeating alpha, and changing market conditions, create a challenging environment for active managers to consistently outperform passive benchmarks over the long term.
One such manager navigating this landscape is Karl Rogers, who operates within the hedge fund segment of the alternative investment industry. Unlike traditional active managers, Rogers does not invest in 'other' factors beyond market risk when using the Capital Asset Pricing Model (CAPM). Instead, he focuses on pure alpha returns through active investment in market-neutral/low to no beta strategies.
The Capital Asset Pricing Model (CAPM), developed by William Sharpe in 1964, is a single factor linear model that states an asset's expected return is equal to a combination of the factor of market risk to that asset and alpha. On the other hand, the Arbitrage Pricing Theory (APT), developed by Stephen Ross in 1976, is a multi-factor pricing model based on the idea that an asset's returns can be predicted using the linear relationship between the asset's expected return and a number of macroeconomic variables that capture systematic risk.
Rogers employs both these models in his unique investment philosophy. When using CAPM, he focuses on pure alpha returns, while with APT, he invests in cheap, passive investments in the proxy of the market within each asset class. This approach allows him to pay low fees for market risk and other known risk factor exposures, while his active management focuses on market-neutral/low to no beta strategies to generate alpha.
Moreover, Rogers invests in passive ETFs that bring exposure to non-market factors like Fama-French's 4 factors and Carhart's momentum factor. By doing so, he diversifies away idiosyncratic risks, unique risks to individual stocks, as the number of stocks in his portfolio increases.
In 2019, hedge fund active managers with a 2&20 fee model needed to return an additional 55.44% on top of the passive investment's gain to break even on a net return basis versus the passive investment. With the majority of his investments in low-cost passively managed market and factor exposures across the different asset classes, Rogers is well-positioned to navigate this challenging environment.
In conclusion, Karl Rogers' investment philosophy offers a unique approach to the challenges facing active equity hedge fund managers. By focusing on market-neutral/low to no beta strategies, diversifying away idiosyncratic risks, and investing in cheap, passive investments, he aims to generate alpha while minimising the impact of fees and market efficiency.
Active management in finance is a focus area for Karl Rogers, a businessperson navigating the complex landscape of the alternative investment industry. Despite high competition and challenging market conditions, Rogers employs tactical approaches like using pure alpha returns through active investment in market-neutral/low to no beta strategies, to outperform passive benchmarks consistently, as seen in his investment philosophy.
