Electronic alpha capture is poised to become a major workflow tool for every portfolio manager and broker-dealer to help prioritize insights gleaned from incoming data and options, a new report from Tabb Group indicates.
Such “alpha capture” tools can help portfolio managers focus on their primary job – generating alpha, or above-market returns for their funds or customers.
Equally important, alpha capture technology could impact how institutions allocate commission dollars to research providers.
This technology enables the highest conviction ideas to “bubble to the top,” says Adam Sussman, a Tabb partner, head of global research and co-author of the report, along with contributing analyst Kerry Massaro.
The technology also tracks and monitors industry performance, enabling star salespeople and broker-dealers to rise above their competition. In the not-so-distant future, the performance metrics within alpha capture systems could be used universally to determine which brokers get paid and how much, Sussman asserts.
Across the fund management industry, portfolio managers are typically overloaded with information and find it difficult to sort through the noise, converting that information into ideas to generate alpha, Tabb says.
For their broker-dealers, who have been under pressure to perform as the number of broker relationships is decreasing, alpha capture systems provide a new way to track idea performance and compare results of idea generators, adding performance transparency that never existed.
“An objective, user-based measurement of broker-generated alpha can change the buy-side and sell-side relationship by shifting the value performance from the fuzzy logic of a ‘relationship’ to measurable performance,” Sussman says.
On the leading edge of these partnerships in Europe is the use of “pay-for-performance” agreements that have helped brokers create an elite service for their top clients – fund managers who value and are willing to pay for alpha.
“It’s easy to see how these systems, including ‘pay-for-performance’ agreements, can easily shift the ambiguous and often subjective process of allocating commissions to one that is thoroughly standardized and metrics-based,” Sussman concludes. “It will likely take the industry a while to get there, but when universally adopted, a simple report generated by alpha capture systems could replace today’s broker vote process.”
Alpha capture systems seek to cut the fees investment fund manager pay for research while allowing broker-dealers to find new ways to distribute research at lower costs.