Investors are chasing alpha and sophisticated clients are willing to pay premium fees for it, according to Bloomberg columnist Chet Currier.
However, alpha is tricky and the minute individuals get their hands on it, alpha beings to lose its special character and to look more like ordinary beta.
Active managers began to earn their keep when results emerged from the beta background and began to produce alpha. More active managers emerged trying to join the ranks of Warren Buffet of Berkshire Hathaway and David Swensen of Yale University and went into the alpha business.
That way of looking at things contributed to the popularity of hedge funds. While many standard long-only mutual funds are tied to indexes they try to beat, hedge funds are free to pursue pure alpha however they wish.
However, the more hedge funds and other alpha-seekers join the search for alpha, the more intangible alpha threatens to become.
Alpha can have long-term value for a select few, usually the earliest individuals to find it. Those who find alpha later and want to produce above average results usually use methods such as leveraging up risk with borrowed money.
Leveraged beta may impersonate as alpha for a while, but in the end it is not the same thing. To qualify as alpha, a market-beating return must be achieved at a degree of risk matching that of the beta to which it corresponds.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.