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In our interview Novogratz suggests what institutional investors hate to hear and what many managers I spoke to for this story wouldn’t say on the record: He’s smart.

“It’s hard to teach young traders this,” he says, referring to macro investing. “You’re either good at it or you’re not.” Most asset managers won’t say they’re smart — at least, not in public — because their investors want to hear about a formal investment process that can be taught and repeated. They want alpha to be sustainable. Of course, if the process of delivering alpha can be easily documented, others can — and will — copy it, and returns should go down over time.

After the conference I chase down Cliff Asness again. It took me some time to fully understand his wavering between agreeing with me that alpha is tougher to find and asserting that it’s always been hard. Then it came to me that Asness has survived in the hypercompetitive world of investment management by redefining alpha altogether. As head of quant research at GSAM in the early ’90s, he had a front-row seat on the decline of alpha. He was among the first to commercially exploit the then-new ideas on value and momentum investing written up in academic literature, and he watched as others copied the strategy. But Asness has invested heavily over the years to keep AQR ahead of fierce competitors. In some ways, for AQR, alpha hasn’t gotten harder to find, but that’s deceiving given the scope of research and development efforts designed to give it an edge.

AQR offers an enhanced version of the strategy Asness pioneered at GSAM, but the firm is transparent with clients about that and charges far less for it than would have been the case 20 years ago. Asness explains that the strategy improves portfolios’ risk-return characteristics, even if it’s not technically alpha in the sense of a secret sauce that no one knows about. “We use the phrase ‘It’s alpha to you,’” he says.

Asness emphasizes that systematic risk premiums that look like alpha — owning cheap stocks and shorting expensive ones, for example — still work. “I mean ‘work’ like a statistician means ‘work’ — more often than not,” he says. “If your car worked this way, you would fire your mechanic.” For those strategies AQR has separated alpha from beta and offers cheaper beta solutions for clients.

Even as alpha has been weakened by trading advances, managers can add some of that back. J.P. Morgan Asset Management considers its buy-side trading prowess a big part of how it delivers alpha. Being able to skillfully trade and implement a strategy efficiently has become more difficult. But managers can either watch some of their alpha erode from a lack of an investment in this area or they can make sure they have trading skill that adds to returns.

Even with all the examples of excess returns still being available, State Street’s Duncan is done with alpha. “For the investment industry to make money going forward, performance has to be redefined,” she says. “Performance is personal.” Duncan, who along with her team has conducted several hundred face-to-face interviews with investors, believes that portfolios should be designed based on an individual client’s unique set of risks, benchmarks need to be customized, and comparisons to major indexes should be eliminated. Bills can’t be paid with excess returns, she explains; alpha is extraneous.

Georgia investor Willis, who bet me dinner he could persuade me to drop this story altogether, says it doesn’t matter if alpha is dead — investors of all stripes are just too impatient to stick with any strategy long term. He’s convinced that complexity is the enemy of alpha by introducing new risks and a lack of understanding as to what is actually in a given portfolio.

So I go back to Ellis. He too has been advocating that investment managers return to the business of providing tailored advice. He says it’s the one service they can consistently deliver. Managers who promise steady outperformance can’t make good on the pledge. “But what about David Swensen,” I say, trying to speak softly as my voice booms in a cavernous room on the second floor of the Yale Club in Midtown Manhattan. “How can you so staunchly believe that investment managers can’t outperform, when you watched David do it for so many years?” (Even with the losses of 2008, Yale’s endowment returned 13.7 percent a year over the two decades ended June 30, 2012.)

Ellis is undeterred, making the case that Swensen’s skill is not unlike that of a Picasso or a Renoir. “He’s the most rigorous thinker about investments in the world,” says Ellis. He starts to go on, then pauses. The great thing about Ellis is that he doesn’t just tell one story to illustrate his point; he tells many.

He says that when he learned how to race sailboats when he was a kid, he was taught never to follow the leader. “He’s already beaten you,” he explains. “You have to do something different.”

Ellis notes that only after reading Swensen’s Pioneering Portfolio Management a couple of times do you realize how the Yale CIO thought through the entire investment process, from protecting his portfolio to assessing the characters of the investment managers he hired. Then Ellis takes me back to his first job after graduating from Yale in 1959, when he managed WGBH-FM in Boston. Julia Child, the woman who brought French cooking to the U.S., was just getting her career started with WGBH’s TV station. Child became an icon as Americans fell in love with dishes like coq au vin, trying to emulate her complex and time-consuming techniques in a world that was getting its first taste of TV dinners. Ellis smiles and says, “After watching her, people always wondered why their creations weren’t as marvelous.”

Chefs can’t learn their craft from the couch by simply imitating the steps of Julia Child any more than investors will uncover the secret to finding alpha by mimicking the moves of a Peter Lynch or David Swensen. • •

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