Alpha “Makes the (Blog) Rounds”

CAPM / Alpha Theory 29 Nov 2006

Much like a Hollywood movie star “making the rounds” to various talk shows to promote their latest movie, Alpha seems to have been promoting itself at some high profile blogs this week.  Could it be related to Alpha’s upcoming thriller “Why is Everyone Trying to Kill Me?”  

Going Private, The Sardonic Memoirs of a Private Equity Professional discusses “compensating alpha“, a topic very close to our hearts: 

“There are any number of avenues of attack open to critics of hedge funds nowadays. Among the more recently fashionable is the accusation that hedge funds have fees out of proportion to their risks. Or, more commonly, an unsophisticated barb that seems to resonate much more sharply with the public even if it avoids the question of risk-adjusted returns, that hedge fund managers simply charge too much.”

Going Private refers to The Economist’s “Send in the Clones” and the New York Times coverage of Lisa Rapuano and concludes (quite rightly, we believe) that:

“…it seems reasonable to suggest that separating the fee structures of alpha and beta returns might also be a useful endeavor”.

The blog goes on to include a simple mathematical example of said alpha/beta fee separation.

Meanwhile over at the HedgeFund.Blogspot.com studio…

Blogger Veryan Allen is less impressed with alpha/beta seperation.  In a recent posting “portable alpha and diversification”, Allen opines:

“When is a portfolio diversified? Is portable alpha the investment panacea? Focussing on the separation of beta and alpha could divert attention from what people actually need – consistent, risk-adjusted, absolute returns.”

“The current trendy topic is the separation of alpha and beta. But this assumes such a performance attribution split is necessary or desirable in evaluating strategy classes. Even the most “market neutral” hedge fund is dependent on some underlying, possibly changing, market factors. This hyperbolic focus on “Was it alpha or beta?” misses the point. What actually matters is getting a blended portfolio return in the vicinity of 10% with the highest reliability at the lowest volatility, under ANY market or economic scenario, EACH and EVERY year.”

But while Allen is skeptical of portable alpha per se, regular readers of AllAboutAlpha will note he shares many points of agreement with this blog concerning a broader analytical framework we call “alpha-centric” investing.  (HedgeFund.Blogspot.com also posted a great piece on defining alpha last week that we had missed).   

We just hope Alpha keeps its cool under such intense questioning and, above all, avoids “jumping the couch” while making the rounds.

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