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Appleby Capital_Death of Alpha Presentation - May 2013

Appleby Capital_Death of Alpha Presentation - May 2013

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Published by tabbforum
Four forces have driven a nail in Alpha’s coffin, and they are all structural, not cyclical. Here’s a look at what it all means for the industry.
Four forces have driven a nail in Alpha’s coffin, and they are all structural, not cyclical. Here’s a look at what it all means for the industry.

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Categories:Types, Research
Published by: tabbforum on May 17, 2013
Copyright:Attribution Non-commercial

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12/24/2013

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Confidential 
The Death of Alpha and its Impact on Wall Stree
 
May
2013
 
What happened to Alpha?
Market Environment/Trends
I.
The Internet
 –
provided the low-cost communications tool for companies todisseminate information to investors simultaneously. The traditional role of intermediary for the investment banks was greatly diminished if not moved toobsolescence
II.
Regulation Fair Disclosure
 –
enacted in August 2000, required all publicly tradedcompanies to disclose material information to all investors at the same time.
IB’s
 and their analysts no longer could receive and disseminate selective information
III.
Electronic Trading
 –
less obvious but equally onerous. Most trading is now doneelectronically and when combined with the increased fragmentation of executiondestinations and the lack of natural order flow (because there is no research call),has put the pricing pressure in the hands of the buy-side.
IV.
IPO’s
: their number and their upside potential are virtually non-existent. The IPOcalendar, long a material alpha generator, has fallen to just 14% of the number between 1995-2000, and still only 26% of the more normal 1980-1994 period. Evenwhen there are deals, the private equity firms are now the
“customer”
not theinstitutions. As a result, the IPO discount of 15%, has been largely eliminated and isbeing absorbed by the selling shareholders
CONFIDENTIAL
Why should institutions pay wall street if they cant makemoney?
 
The State of Industry
Market Environment/Trends
Equity ADV down 20% in last 2 years
 –
you
don’t
 need to see another chart on this
Equity Brokerage Revenues are down 40% Y/Y,in Q4 2012
40% fewer public companies than 10 years ago
60% fewer companies with analyst coverage
75% fewer 
IPO’s
than the period between 1980-1994 and 85% fewer than 1995-2000
CONFIDENTIAL
“Passive
investing,
anyone?” 
 
 Active investors, both institutional and retail, are not participating as they have inpast as evidenced by the lack of mutual fund inflows
 –
save a recent inflow rally
Major institutional and most hedge funds are consistently underperforming
 –
evenHFT returns have fallen dramatically
 –
although still providing adequate
ROI’s
 
9 out of the last 10 years, hedge funds have underperformed the S&P 500
 –
PEreturns have not been much better 
On average 75% of all equity manager underperform the market

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