‘People Alpha’ describes the potential additional value Hedge Funds can earn by focusing on the Human aspects of Financial Market performance.
Research suggest that generating ‘People Alpha’ represents be a major source of competitive advantage that is more than just marginal.
How does ‘People Alpha’ add value to a Trading and Investment Business?
‘The term ‘People Alpha’ was coined by researchers looking into the potential value-add that focusing on people practices bring.
The research showed a clear and significant edge from focusing on developing these people practices.
Focusing more deliberately on their people practices includes taking some of the following actions:
• Developing more effective leaders and leadership teams.
• Better strategic planning of human capital for future needs.
• Improving cross team collaboration.
• Upskilling and refining skills of key producers and their teams.
• Improving the implementation of technology and new systems.
• Refining skills of key producers and their teams.
• Helping key people adapt to change and different levels of responsibility.
• Improving internal communications, for which the opportunity cost of sub-optimality can be huge.
• Improving strategy, planning and execution of business performance and system creation.
• Cultivating a culture which enables people to be more effective and make better decisions.
• Reducing stress and anxiety, with the huge benefits on productivity, efficiency and effectiveness.
• Developing tomorrow’s leaders who are committed to and understand the business.
• Creating future career paths for up-and-coming talent, leading to better employee retention and loyalty.
How Much Could Firms Benefit by Focusing On ‘People Alpha’?
Research from Citi Prime Finance looked at the people practices and coincidental returns of a group of leading hedge funds.
The research found that the firms who gave the highest attention to the ‘People Aspects’ of their business saw significantly stronger returns
The extra returns generated equated to around 600 basis points over 3 years when compared to their peers who placed low emphasis on people practices.
In a world of fine margins, 600 basis points or 200 basis points per year, is a huge deal.
Over the past 5 years alone, average hedge fund returns have been around 500bps per year. So 200bps equates to a premium of 40% per annum.
imagine how valuable one individual alone would be who could contribute an extra 200 basis points a year return, per year on a firms total AuM?
People Alpha is not a marginal issue, it can be the difference between success, mediocrity and failure!!
People Alpha has the potential to be a game changer which puts a firm well ahead of its rivals.
Hedge Fund Insight ran an article a few years back, which highlighted Bridgewater Asset Management as one firm which places huge emphasis on ‘People Alpha’.
Why Are Financial Markets Firms So Poor at Developing ‘People Alpha’?
Despite this, historically Hedge Funds and Financial Market (FM) businesses have been extremely poor at developing their people practices.
We see the key reason for this is a historical focus on being highly ‘transactional’ in their outlook.
By transactional, we mean they take actions and look for attributional results.
All processes,practices and culture are geared to supporting this transactional approach.
Developing ‘People Alpha’ is a process, it is not transactional, nor is it directly attributional or immediate.
In addition, most leaders are usually ex-traders, investors, salespeople. Hence ‘people-focus’ is not an area of core-expertise for them.
Thus, the human side of performance and business practice is relegated in significance: Investment and energy are spent on core business activities.
Where developing ‘People Alpha’ is practiced, it is often done within the HR function.
Yet, we see developing People Alpha is an ‘Organisational Development’ activity.
However Organisational Development (OD) is largely absent in many FM firms.
Where they do exist, they are often part of the HR function, which we feel restricts their effectiveness.
People Alpha is not Sexy, but it is vital!
The ‘People Alpha’ aspects of financial market performance and behaviour may not be hot or sexy, but they are vital for success.
The modern business environment is increasingly defined by the term VUCA (Volatile, Uncertain, Complex, Ambiguous).
Businesses who succeed in these environments will be those who are most anti-fragile and agile in their approach.
we feel the transactional model is no longer enough on its own.
To survive and thrive, FM firms need to start developing a whole system and organisational development approach.
The ‘People Alpha’ aspects of financial market performance and behaviour may not be hot or sexy, but they are vital for success.
If you enjoyed this article:
You may enjoy some of our other articles which explores a range of themes related to human performance in Financial Markets. This includes,’Organisational Development: The Answer Trading & Investment Businesses Need.’ and other posts on our Articles Page.
We are passionate about working with people and businesses that want to better themselves.
If you are curious about any aspect of our work, or would like to understand more about how we could help you or your business: Then please email us at info@alpharcubed.com.
