Investment alpha: Finding money down the back of the sofa

by Tim Dier

investment alpha

Does risk free alpha exist?

During times of challenging investment returns, runaway cost inflation, and downward fee pressure, there has never been a more pressing time to seek out and defend hard-earned investment alpha. In any quarter, beating the MSCI ACWI benchmark, or retaining an endowment allocation can come down to a matter of basis points of performance.

With alpha calculated and reported net of all trading costs, sometimes the easiest sources of alpha – or retaining alpha – are staring us in the face. The lowest hanging fruit can often be found in some of the least suspecting places, far away from highbrow investment committees.

Investment alpha is always reported net of trading costs and stock lending costs. Relative to our competitors our low cost structure is an integral factor in the strength of our alpha.

10½ Lessons from Experience: Perspectives on Fund Management. 2020. Paul Marshall.

Where can we cut costs and boost alpha?


Often considered as boring housekeeping for investment managers, many CIO’s and PM’s eyes glaze over when they hear the words foreign exchange, currency balances, repo, clearing or financing fees. But bear with me. Understandably risk averse and overworked operations teams have been known to hug the “If it aint broke don’t fix it” blanket tightly, and historically they may have been right. But are we all now missing a trick?


Many of these periphery areas were overlooked in the past when stellar investment returns seemed easier to come by, but they now demand a closer look. The time has come to go beyond the box ticking of fiduciary best execution and seek out genuine cost leadership. Every dollar of savings goes straight to your bottom line and strengthens your competitive advantage, a win:win for you and your investors.


Some fund costs are transparent, but others are more opaque and harder to identify. Both negatively impact fund performance. When, if ever, did you last identify and analyse these periphery costs? Have your volumes, AUM or strategy changed over time? When did you last consider renegotiating terms, and did you have an idea of what your peers were paying? Has the market price fallen for a particular service, but you are unwittingly stuck on legacy pricing and funding your counterparty’s box at Wimbledon? These are all questions we should be asking ourselves.


Optimising transaction costs


Getting on top of and actively monitoring these costs can deliver risk free returns right at the time when they are needed most. A popular stock with investors over the years – Ryan Air – is favoured for its cost leadership qualities, which helped it beat off countless competitors and largely ride out the Covid storm. Achieving cost leadership alone is by no means a panacea, but it is necessary to tip the odds in your favour. Yet while we relish recognise these qualities in others, we sometimes forget to look closer to home. The cobbler’s children have no shoes.

Once you recognise that a cost leadership culture can help boost alpha and strengthen your competitive advantage, it is time to design and implement or improve existing processes to measure and manage costs. Incentivising your teams to achieve these aims is only just part of the equation.

Few investment managers have the resources or bandwidth to manage cost optimisation initiatives exclusively in-house. So where can you turn to for help on this journey? OptimX offers a fund expense health check service to identify and help reduce some of these peripheral costs, delivering a risk-free boost to your returns for you and your investors. We would be glad to partner with you on your cost optimisation journey. You may be pleasantly surprised by what we can achieve together.