ILS Managers Pitch “Alternative Beta” Prior to $33B Fund’s Review

Two investment managers with insurance-linked securities products gave presentations before the $33.7 billion Arizona State Retirement System (ASRS) offering their solutions to the fund’s exploration of “alternative beta” investments, according to fund documents.

The presentations were followed by a the launch a new asset allocation study by ASRS, putting the managers in contention for a possible mandate.

Stone Ridge Asset Management’s CEO Ross Stevens and AQR Capital Management CIO Cliff Assness were listed as presenting and participating in a roundtable discussion of “Alternate Beta Investments & Return Generating Factors” at the August 18 meeting of the ASRS Investment Committee.

The only other investment manager listed as presenting at the meeting was Bridgewater Associates, according to the agenda.

The meeting was was “intended that the discussion among forum participants will focus on fostering engagement rather than on specific immediate investment decision-making,” the fund’s documents state, adding that it was seeking additional input to “supplements to investments in traditional beta asset classes.”

While the Stone Ridge presentation was redacted, Assness’ presentation on alternative beta argued that the strategies offered efficient access to alternative returns. “Fees and transaction costs make active management a negative sum game in aggregate [and] Alpha — while it exists — is hard to come by and must be taken from others,” the presentation states. “In short, people often pay too much for “alpha” that isn’t really alpha (or isn’t even there).”

“Alternative Beta” has become the go-to sector pitch for ILS and catastrophe bond managers looking to market themselves to large, institutional investors. Broadly defined, alternative beta is the theory that volatile alternative investments can be managed in way that increases transparency and reduces cost, similarly to “beta” investments like index funds.

ILS firms fall into the category — it is argued — because the can extract “risk premia” from catastrophe bonds while creating systematic and transparent returns.

Although no hiring action was taken as a result of the presentation, ARAS did approve an asset allocation study that could tee up an alternative beta play next year. The study will be completed in the fourth quarter of 2014, according to plan documents. The last study was completed in 2013.

The study is being conducted by NEPC, with Dan Lebau and Allan Martin listed as consultant contacts, according to the material.

Calls and emails to ASRS representatives were not retuned prior to publication.

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