This type of financial re-engineering makes sense to Christopher Campisano, director of equities for Atlanta-based Delta Air Lines Inc.'s $8.6 billion defined benefit plan.
"You may think the return you're getting is alpha, because the manager outperformed the S&P 500. But maybe the outperformance is caused by a bias toward smaller-cap stocks. Then, all you're doing is capturing the difference in price cycles between large-cap and small-cap. That's not truly alpha, it's just a different kind of beta than you were expecting."
A "sea-change in the institutional management business" may follow this separation of alpha — the enhanced returns — and returns generated from market exposure," Mr. Campisano said.
Jeffrey Geller, director of investment management and research at Frank Russell Co., Tacoma, Wash., said the idea of separating market returns from excess returns isn't new or revolutionary. Instead, he said, it represents the next logical step in the progression of investment management, following enhanced indexing strategies.
But hedge funds are just one wrinkle in this puzzle, and "far more profound changes" are coming, Mr. Dalio wrote.
"Soon they (investors) will be looking at the alphas that come from the active management of their traditional asset classes and thinking about how they can be re-engineered and combined into a larger portfolio of alphas that will include hedge funds," Mr. Dalio predicted.
Not everyone agrees with the reports. Charles Gradante, president and CEO of the New York hedge fund advisory firm Hennessee Group LLC, said limits on the availability of securities to short would be one reason not to expect hedge fund-like strategies to become the new norm in asset management.
"The issue becomes the short side of the business model," Mr. Gradante said. "That becomes the limiting factor in how much the industry can grow and still maintain its hedge fund-like strategy."
Other potential problems include the availability of top-performing managers, capacity constraints in various strategies and a proven reluctance on the part of pension executives to embrace derivatives and leverage, both keys to alpha generation, according to the reports.
The Bernstein report also said hedge funds may encounter problems in trying to service too many clients and because of the increasing number of players crowding the area. "How does a hedge fund grow assets and people without reverting to being the traditional asset manager that it once rejected?" the study asked.