Lifting the Hood

CAPM / Alpha Theory 02 Jan 2007

By: Pierre St. Laurent, Advisors Edge Magazine
Published: November 2006

This article from a leading Canadian publication for financial advisors contains an article that succinctly shows how a mutual fund can be thought of as a marketing package for an embedded ETF and an embedded market neutral hedge fund.  In it, columnist Pierre St. Laurent interviews the head of AllAboutAlpha.com’s parent company, Holt Capital Advisors.

Says St. Laurent:

“The key here is the ability to separate alpha from beta, to wit, measure the relative weightings of alpha and beta in an investment. What percentage of your favourite mutual fund is alpha? Beta? And then, are you really index-hugging and paying too much for what amounts to a lot of beta?

“That’s the approach Holt has pursued and his results are well worth your attention.

“By borrowing from a well-known methodology developed by William Sharpe called returns-based style analysis, Holt simulates the “hedge fund” in using historical returns — an investment’s “tracks in the sand” as Sharpe described it — and regression analysis to strip out the components of a well-known Canadian fund.”

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