Comments on: Report: “Exposure yardsticks may provide little insight about a fund’s alpha potential” http://allaboutalpha.com/blog/2008/05/15/report-exposure-yardsticks-may-provide-little-insight-about-a-fund%e2%80%99s-alpha-potential/ A finance blog about hedge funds, portable alpha and alternative investing. Mon, 13 Feb 2012 11:26:54 +0000 http://wordpress.org/?v=abc hourly 1 By: Bill aka NO DooDahs! http://allaboutalpha.com/blog/2008/05/15/report-exposure-yardsticks-may-provide-little-insight-about-a-fund%e2%80%99s-alpha-potential/comment-page-1/#comment-106408 Bill aka NO DooDahs! Fri, 16 May 2008 13:38:02 +0000 http://allaboutalpha.com/blog/2008/05/15/report-exposure-yardsticks-may-provide-little-insight-about-a-fund%e2%80%99s-alpha-potential/#comment-106408 This strikes right at the heart of the TRUE definitions of Alpha and Beta ~ they are metrics applied to a series of returns versus a relative benchmark, not commodities to be purchased, or exposures to asset classes. An active strategy for domestic U.S. stocks may be 100% long 100% of the time, and still measure a Beta that is significantly different from that of the U.S. market benchmark it draws potential long candidates from. Therefore a fund committing X% of their capital to such a strategy may get LESS "Beta" than they would if they committed that X% to cheap index tracking. In the end, it's not the activity level that dictates performance potential relative to the benchmark; it's the quality of the STRATEGY that dictates relative performance, regardless of which benchmark-relative performance metric is used (Alpha, Beta, etc.). This strikes right at the heart of the TRUE definitions of Alpha and Beta ~ they are metrics applied to a series of returns versus a relative benchmark, not commodities to be purchased, or exposures to asset classes.

An active strategy for domestic U.S. stocks may be 100% long 100% of the time, and still measure a Beta that is significantly different from that of the U.S. market benchmark it draws potential long candidates from. Therefore a fund committing X% of their capital to such a strategy may get LESS “Beta” than they would if they committed that X% to cheap index tracking.

In the end, it’s not the activity level that dictates performance potential relative to the benchmark; it’s the quality of the STRATEGY that dictates relative performance, regardless of which benchmark-relative performance metric is used (Alpha, Beta, etc.).

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