Browsing: CAPM / Alpha Theory

CAPM / Alpha Theory

What is Right & What is Wrong With the Sharpe Ratio?

Jul 30th, 2014 | Filed under: CAPM / Alpha Theory, Risk management

Despite what the title (Deflating the Sharpe Ratio) might cause a naïve observer to suspect, de Prado's recent presentation was more pro than con the ratio in question. Mend it, don't end it. Read More


A Challenge to Bayesian Probability

Jul 23rd, 2014 | Filed under: CAPM / Alpha Theory, Performance, Analytics & Metrics

The stakes, for mathematics, finance, and the overlap of the two, are pretty high. So my ears pricked up when I heard of a sweeping challenge to Bayesianism. Read More


Winner Takes All, and Liquidity Takers Win

Jul 22nd, 2014 | Filed under: CAPM / Alpha Theory, Algorithmic and high-frequency trading, Derivatives

It does appear that speed is helpful in generating alpha. How is it helpful? Here there are two views, and the less HFT-friendly of these views has received some scholarly/empirical support. Read More


GMI Numbers-Crunching Predicts Stock Returns

Jun 30th, 2014 | Filed under: CAPM / Alpha Theory, Performance, Analytics & Metrics, Alpha Strategies

Starting with 350 available metrics of corporate governance and/or forensic accounting, GMI Ratings has boiled their model down to just 64, and from those they get three scores. Read More


Remembering Enron and Contending with Warren Buffett

Jun 17th, 2014 | Filed under: CAPM / Alpha Theory, Alpha Hunters, Alpha Strategies

An aphorism of Warren Buffett's once again making the rounds can be understood in at least three distinct ways. Faille looks at the possible constructions and decides that, whatever exactly Buffett meant to say or do, his reasoning here does little harm to his target, modern finance theory. Read More


Europe’s Valuation Practitioners Say: To Heck With Theory

Jun 3rd, 2014 | Filed under: CAPM / Alpha Theory

A recent survey of firm-valuation experts from 10 European countries indicates that they can produce wildly different values given the same inputs. Okay: maybe that’s not too surprising. Any valuation model will necessarily include parameters that will in turn require a best-guess approach, often as subjective in inspiration as itRead More


Axioma on those Low-Vol Picnic Baskets

Jul 25th, 2013 | Filed under: CAPM / Alpha Theory, Alpha Strategies, Indexes

The success of low-volatility strategies has been noted in the literature at least since the mid-1970s, with the publication of a seminal work by Haugen and Heins. And such strategies continue to prove successful today. Why do they still work? Why don't the excess profits draw in the bears, consuming all the picnic baskets, driving profit levels down to normal? Read More


Stop Loss (and Gain) Rules as Alpha Generators

Jul 15th, 2013 | Filed under: CAPM / Alpha Theory

A strategy based largely on stop-loss and stop-gain rules, one that uses such rules as the sole means of shifting assets from one asset class to another, can earn statistically significant CAPM alpha, according to a provocative study from the University of Arizona. Read More


Doing Penance for the Draw-down

May 20th, 2013 | Filed under: CAPM / Alpha Theory, Performance, Analytics & Metrics, Alpha Strategies

Under standard portfolio theory assumptions, it takes three times longer to recover from the maximum draw-down for a particular strategy than it does to get there. Fortunately, those assumptions seem to be wrong in a way that allows for a more rapid return to a high water mark. Read More


A Reductionist View of BAB, Debunked

May 12th, 2013 | Filed under: CAPM / Alpha Theory, Alpha Strategies, Alpha Seekers

Asness, Frazzini and Pedersen produce data indicating that over a long period in the U.S., a regular bet-against-beta strategy, one not designed either to accentuate or to eliminate differences among the different industries represented in the portfolio, earned CAPM alpha of 0.73. Read More


A Bayesian Rethinks CAPM

May 7th, 2013 | Filed under: CAPM / Alpha Theory

A portfolio becomes optimal by virtue not merely of what assets are in it, but by virtue of what is paid for each. Examining the implications of that point, Professor Johnstone finds a "logical circularity built into the CAPM equilibrium pricing mechanism."Read More


A Long-Dead Mathematician and Some Very Lively Problems

Apr 23rd, 2013 | Filed under: CAPM / Alpha Theory

D.J. Johnstone of the University of Sydney Business School tells us that if we understand Bayesian probability theory, we'll see that even a very informative signal can bring an increase in uncertainty, thereby raising the cost of capital. This is at least a little bit counter-intuitive, offending the verities about how wonderful is transparency. Read More


Sibling Rivals: CAPM versus The Risk Parity Portfolio

Aug 16th, 2011 | Filed under: CAPM / Alpha Theory, Hedge Fund Industry Trends, Performance, Analytics & Metrics, Hedge Fund Operations and Risk Management, Institutional Investing

By Christopher Faille A presentation by Samuel Kunz, chief investment officer of the Policeman’s Annuity and Benefit Fund, Chicago, to the CFA Institute 2011 Asset and Risk Allocation conference addressed the pros and cons of “risk parity.”  His presentation makes it seem that risk-parity portfolios (RPP) and the Capital AssetRead More


How well does your hedge fund hedge?

Jul 5th, 2011 | Filed under: CAPM / Alpha Theory, Hedge Fund Operations and Risk Management

A perfectly "hedged" fund is one which has no downside risk. Its payoff relative to the market or some other benchmark is the same as that of the fund plus a put option that provides protection against the downside. In the real world...Read More


Alpha not “dead” – just not always better than beta (as long as you’re sure about the future direction of markets of course)

May 1st, 2011 | Filed under: CAPM / Alpha Theory

A recent research note concludes that alpha (as a performance measure) passed away recently after along battle with beta-tosis and several other ailments. But wait! Did Alpha's nose just twitch?Read More


The Interaction of Demand and Supply Curves for Alpha

Apr 20th, 2011 | Filed under: CAPM / Alpha Theory

If only the marketplace for alpha fit neatly into a model from an Economics textbook.Read More


New spin on the Fundamental Law of Active Management finds US mutual funds were “a victim of their own success”

Mar 31st, 2011 | Filed under: CAPM / Alpha Theory, Real Estate

Finally, a version of the Fundamental Law that fundamental managers can actually use. But be forewarned, if you're a fundamental mutual fund manager, you won't like what it has to say... Read More


The “Most Diversified Portfolio”

Mar 27th, 2011 | Filed under: CAPM / Alpha Theory

Think your basket of thousands of stocks is the most diversified portfolio possible? Maybe not...Read More


Study finds that factor timing isn’t actually a huge source of hedge fund alpha

Mar 16th, 2011 | Filed under: CAPM / Alpha Theory

In the never-ending search for the source of hedge fund alpha, some have looked to factor timing. But a new study suggests that this, like many other possible explanations, falls short of explaining the hedge fund secret sauce.Read More


Managers operating in mature and “efficient” markets rejoice! Study finds you too can generate alpha.

Feb 22nd, 2011 | Filed under: CAPM / Alpha Theory

Thought managers in "inefficient markets" like emerging markets or small cap equities had the advantage when it comes to alpha-generation? Maybe not...Read More


Institutional ownership nears all-time highs. Good or bad for alpha-seekers?

Feb 2nd, 2011 | Filed under: CAPM / Alpha Theory

If a recent study of French institutional investors can be applied to a recent report on US equity markets, alpha opportunities abound for years to come.Read More


Study finds private equity “four-peats” can be more difficult than previously thought

Jan 19th, 2011 | Filed under: CAPM / Alpha Theory

Success breeds success – and expectations of continued success. Except in private equity, where success bodes reversion to the mean, a recent study on performance persistence argues.Read More


Pop Quiz for Long/Short Equity Investors: When does a high “up-capture” not cost you a commensurately high “down-capture”?

Dec 7th, 2010 | Filed under: CAPM / Alpha Theory

The dream long/short equity fund is one that has a high market "up-capture" with little or no market "down-capture". But how do you find your dream fund when up-capture and down-capture fluctuate all the time? Here's one innovative idea... Read More


Finding money where there’s no liquidity

Nov 17th, 2010 | Filed under: CAPM / Alpha Theory

Retail and high net worth investors can now gain access to hedge funds through a number of more liquid vehicles. But is their liquidity one of the very reasons their performance may be lower? Read More


Hubbert’s Peak: Is the world running out of “cheap alpha?” If so, here’s an idea…

Nov 12th, 2010 | Filed under: CAPM / Alpha Theory

The search for alpha is much like the search for oil, prompting us to muse a few years ago about whether there was going to be a Hubbert’s Peak in alpha. But regardless of whether the world is running out of “cheap alpha,” the process of refining crude returns intoRead More


Stock-picking alpha in a life or death struggle?

Oct 31st, 2010 | Filed under: CAPM / Alpha Theory

With stock dispersion at all-time lows, is the art of stock-picking dead or just napping? Read More


Downer for hedge fund managers: Apparently you have no skill, talent or alpha

Oct 6th, 2010 | Filed under: CAPM / Alpha Theory

A recent academic study finds that hedge fund managers has "zero" ability to put their market timing skills to proper use and produce alpha. Read More


Modern Portfolio Theory: Break free dude!

Aug 12th, 2010 | Filed under: CAPM / Alpha Theory

Modern portfolio theory, the hallmark of institutional investing, isn't so modern anymore, according to a new report by State Street that encourages embracing new types of risk models and investment options.Read More


New factor on the block: Research suggests you don’t need alternative investments to get an “illiquidity premium”

Aug 2nd, 2010 | Filed under: CAPM / Alpha Theory

Move over "momentum factor", there's a new kid in town and it's one that is familiar to the alternative investment industry. Read More


Study finds market “under-reaction” to Buffett’s 13F filings, proposes trading strategy to exploit it

Jul 28th, 2010 | Filed under: CAPM / Alpha Theory

In an age where hair-trigger investors exploit information in nanoseconds, here's a trade you can apparently take your sweet time to make.Read More


Capturing Political Alpha

May 23rd, 2010 | Filed under: CAPM / Alpha Theory

Here's another reason to count domestic and geopolitics as betas.Read More


When is alpha not really “alpha”? When it’s “beta-alpha.”

May 12th, 2010 | Filed under: CAPM / Alpha Theory

A paper by a pair of institutional investment consultants challenges the notion of a "stock-picker's market" and finds that "beta-alpha" is the real source of returns - at least for US large cap managers. Read More


What NASCAR Can Teach Us About Return Persistence

Apr 28th, 2010 | Filed under: CAPM / Alpha Theory, CAIA Alternative Viewpoints

At the very least, NASCAR and Formula One share two things in common with the alternative asset management industry...Read More


The Five Faces of Alpha (II): “True” alpha reveals itself

Apr 7th, 2010 | Filed under: CAPM / Alpha Theory, Hedge Fund Industry Trends, CAIA Alternative Viewpoints

Today we bring you part 2 of Erik Einertson’s special to AllAboutAlpha.com “The Five face of Alpha”  (first installment here)… Alpha #2: Insurance Beta The second type of “Alpha” often found in the market can be referred to as insurance beta or Informationless Investing (Weisman 2002). This type of exposureRead More


The Five Faces of Alpha

Apr 6th, 2010 | Filed under: CAPM / Alpha Theory, CAIA Alternative Viewpoints

As we have noted over the past several years, alpha is notoriously difficult to define and isolate since its existence depends not only on the target being observed, but on the perspective of its observer.  The more we study alpha, it seems, the less we know about it. We areRead More


Examining “Real Alpha” and “Exotic Beta” in mutual funds

Feb 1st, 2010 | Filed under: CAPM / Alpha Theory, Retail Investing

Usually the term "exotic beta" is associated with hedge funds. Finally, it's being applied to the largest pool of active management - mutual funds. Read More


New study of mutual fund alpha shows that what-goes-around-comes-around

Jan 27th, 2010 | Filed under: CAPM / Alpha Theory

A study of the variables driving mutual fund alpha also reveals something about the changing nature of markets themselves. Read More


Why bother separating alpha and beta? Here’s why.

Nov 8th, 2009 | Filed under: CAPM / Alpha Theory

With the un-alpha-like performance of the hedge fund portion of portable alpha strategies last year, it's easy to disregard alpha/beta separation as hype. But here's a must-read paper that shows why the concept is fundamentally sound.Read More


One reason why equity allocations may never fully recover from recent injuries

Oct 28th, 2009 | Filed under: CAPM / Alpha Theory

Institutional equity allocations have dropped along with the markets over the past 2 years. But even as the market rebounds, there may be some fundamental reasons why institutional investors will throw in the towel on "60/40" for good this time around.Read More


Active management redeemed?

Oct 5th, 2009 | Filed under: CAPM / Alpha Theory

A plethora of studies have shown that, on average, active management doesn't pay. But so many "active" funds are just closet indexers. So what happens when you analyze only the truly active funds? The results might surprise you. Read More