A Mass of Alpha
Sep 28th, 2006 | Filed under: CAPM / Alpha TheoryBy: John Mauldin
Published: May 9, 2004
Alpha Male just came across this little ditty from the prophet-cum-best-selling-author John Mauldin. In his weekly newsletter, Mauldin refers to a panel he moderated in the spring of 2004 involving several high profile financial speakers. Panelist Mark Finn, CEO of Vantage Consulting, delivered what Mauldin calls a “blitzkrieg of investment wisdom that may take you days to absorb”. Finn’s presentation was All About Alpha.
To help him survive this “blitzkrieg”, Mauldin uses Duke professor Campbell Harvey’s dictionary of financial hyperlinks to review the definitions of Alpha & Beta. (Alpha Male has been a huge fan of Harvey - and of Duke - since attending business school at that hallowed institution). Mauldin goes on to describe Mark Finn’s view of alpha:
“For Mark, alpha is an evolving mass. It is the return that can be captured by innovation and skill, but Mark thinks that in the short run there is a finite quantity of alpha (or excess return) in any given market, with every skill-based manager chasing and trying to capture some of this finite amount of alpha.”
Finn says that while alpha often morphs, its size remains constant:
“Alpha according to Mark can be thought of as a mass of bees flying through the countryside, constantly changing shape, but essentially staying relatively the same size.”
Apparently, Finn was just getting rolling though. According to Mauldin, Finn went on to draw an insightful parallel between alpha and quantum physics:
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[…] We find Ineichen’s Michaelangelo analogy is more complimentary than Jaegar and Wagner’s “garbage bag of a regression analysisâ€, more achievable than their “dark matter†and less scary-sounding than Mark Finn’s “swarm of bees“, […]