Structural Alpha - Chicago Global

At some point algorithms must translate into scalable portfolios. Clearly, fund size erodes the excess returns inherent to any strategy. The firm is entirely bootstrapped from day one: no private equity, no debt, no external funding. Keeping the equity of the firm undiluted allows us to imposed a hard stop on asset growth as a function of investment capacity. Accumulating a gigantic asset base has allowed some managers to cut fees while making a fortune. But reducing the sticker price may carry an enormous opportunity cost. Size forces well-established managers to wade in the large grey area beyond their top picks to deliver a diluted approximation of their best ideas. Their returns, holdings, and correlations demonstrate that as they grow they increasingly resemble a market indexes. And it’s impossible to outperform, unless your portfolio looks different. Gigantic managers will tend to over-allocate to mega caps. Furthermore, factor strategies ‘work’ just as well in places like Korea, Israel and Sweden. Large managers cannot access these markets as their mandates dictate. Entire niche strategies are rendered out of bounds. That’s where Chicago Global can add alpha simply by having access to more markets.