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| Say it sotto voce, the dirty secret of hedge funds is that they mix alpha and beta as well. A typical long/short equity strategy will have a lot of beta, a fixed income arbitrage fund rather less |
These days everyone loves alpha. The pursuit of alpha, we are told, is the proper preoccupation of the rational investor. Fund managers boast of their alpha credentials and pension fund officers declare that alpha will solve the deficit crisis. It is no longer enough for stockbrokers to offer clients share recommendations, they have to add alpha. Alpha is no longer a nice-to-have accessory, it is an existential requirement. Simply defined, beta is the linear return from market exposure and alpha is the non-market-related component of the return of an individual security or portfolio. Alpha is the cream and beta the scone. What’s not to love? Alpha is fun. It is sexy. The head might say that there must be as many losers as winners in a closed investment universe and alpha is a zero-sum game, minus fees and transaction costs. The heart, all in a spin, says otherwise.