The definitions of alpha and beta in the world of institutional investment are becoming more fluid as pension funds take a lens to their historical ‘alpha’ investments and begin to realise they could get access to similar returns at a lower cost.

Danish pension fund ATP, one of the pioneers of alpha-beta separation is currently undergoing a re-structure which could, reportedly, see the reunification of the alpha and beta portions of the portfolio. This appears to largely be driven by the realisation that the beta universe is expanding while the opportunities to generate true alpha are conversely shrinking.

CIO Henrik Gade Jepsen was quoted as saying: “A lot of exposures that used to be considered alpha is actually exposure to a risk factor, so many things thought of as alpha are really beta.””

This could therefore see the pension fund increase its allocations to smart beta indices which capture risk factors present in the market at a fraction of the cost of active management.

Across the pond in the US, institutional investors have been making similar moves, looking to use risk premia as the building blocks for diversification across their equity portfolio rather than the traditional characteristics like geography and sectors.

Alternative indices like the FTSE RAFI and Tobam’s Max Diversification index are designed to capture risk premia such as small-cap risk premium, low volatility and momentum. These offer pension funds a passive vehicle through which they can potentially capture performance.

Historically, this performance was achieved through an active mandate which commanded higher fees.

Pension funds such as the Wyoming Retirement System have implemented a strategy to capture size, value and low volatility risk premia through allocations within its equity portfolio, while the NAV Canada Pension Plan is also said to be making a similar change, looking to capture risk-weighted, value and quality premia.

As alpha becomes more elusive and difficult to define and pension funds remain under pressure to cut costs, one could expect strategies such as these to increase in attraction.