The end of alpha

Alpha is over.

After years of hunting for value add from their active managers, many institutional investors have simply given up, concluding they’re paying too much for it. So says a new report by global research firm Cerulli Associates. The report, called The Evolving Investment Consulting Industry and Business Model, highlights trends and findings about where the consulting space is headed in the future.

Apparently the future isn’t about alpha. Instead, passive strategies are increasingly at the top of the list of options being explored by investors. These lower cost approaches simply mirror an index and help investors get in and out of their positions quickly and easily. That kind of liquidity and simplicity is key post-2008.

That trend will support continued exchange-traded fund (ETF) use on the part of institutional investors, says Cerulli. Transition management along with tactical and strategic exposure are still the primary ways ETFs are being used.

And while fewer than 15% of consultants plan to increase their ETF use, 85% say they plan to maintain their current level of ETF reliance—meaning no one is planning to stop using them in the future.

So it looks as if ETFs are gaining a strong foothold in the institutional space—and within the consulting community. That stands in stark contrast to this report which claims that consultants, in the United Kingdom at least, have stood as a main barrier to the adoption of ETFs within the pension space.

But what does the increased use of ETFs and other passive products mean for consulting firms? Apparently it isn’t going to slow the business down—most are ramping up their outsourced chief investment officer businesses apparently. So the model might be changing—but it’s not going out of style.