Hedge fund alpha remains in the eyes of the beholder
| Nov 29th, 2009 | Filed under: Academic Research, Performance, Analytics & Metrics, Today's Post | By: Alpha Male |
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Like beauty and art, alpha is in the eyes of the beholder. That’s because the interpretation of a return as being alpha depends entirely on the viewer’s perspective: their benchmark. For example, if an investor sought a fund with a large cap US mandate, but her manager decided to invest solely in large cap US technology companies, then her returns could contain a healthy portion of (negative or positive) alpha. But if that same investor sought a large cap US technology fund, those very same returns could be described as nothing more than large cap US tech beta.
To a great extent, the measurement of alpha and beta is all about attributing investment success (or lack thereof) to either the investor or the manager. And since alpha costs more than beta, the measurement of alpha and beta also determines the division of investment spoils between investor and manager.
Nowhere is this more critical than in the hedge fund industry, where alpha and beta are often so difficult to define. As Raj Gupta, Hossein Kazemi and Edward Szado of the University of Massachusetts point out in a research study released last week: More…
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[...] “(T)rying to calculate industry-wide alpha is a mug’s game. Hedge funds are not a cohesive asset class, they are a subset of many “alternative asset classes“. (All About Alpha) [...]