Wednesday, November 01, 2006

PIMCO's Bill Gross: Alpha/Beta Anemia

In his November Investment Outlook (IO) newsletter entitled "Alpha/Beta Anemia", PIMCO bond guru Bill Gross discusses the implications for investors of the new world where risk premiums have declined so that overall market returns (alpha) and returns relative to the overall market (beta) will also be lower.

He talks about strategies for coping with "compressed spreads", but with the flexibility to take advantage of occasional periods of instability when spreads temporarily widen.

He says that "PIMCO hopes to intelligently navigate its way through these seemingly becalmed rapids in future months and years, and remain THE Authority on Bonds."

He asks the rhetorical question: "Does this mean that PIMCO wants to turn itself into a hedge fund on the cheap? Hardly. " The mere fact that he felt the need to bring up the question at all suggests that there is in fact some truth to it. He really does seem to be saying that PIMCO won't be able to place big bets and stick with them, but must have a hybrid strategy and be very agile, exactly as a hedge fund would be. It also suggests that he is personally going to have to work much harder over the coming year and risk burning out or taking risks that might not work out if we hit too many surprises.

In any case, it will be both a tough and interesting year in the bond markets.

I have a suspicion that the stock market may end up being a lot steadier and have a higher return than the bond market over the coming year. In other words higher alpha and higher beta with lower volatility compared to the bond market.

People have come to expect bonds to be steady and safe, but Gross himself is going to be playing bonds as something other than steady and safe, all in a desperate pursuit of a higher return. A volatile bond market may be great for traders and speculators, but not for true investors. At least that's my personal opinion.

-- Jack Krupansky

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