Alternative Beta: Old Wine in New Bottles
Feb 4th, 2007 | Filed under: Alternative Beta & Hedge Fund Replication, Guest PostsBy: Guest Contributor to AllAboutAlpha, Professor Harry Kat, Cass Business School, City University (London)
February 4, 2007 - Currently, there is a lot of talk among investment practitioners about “Alternative Beta”, with the latter roughly defined as the return derived from exposure to “alternative” risk sources. The way in which Alternative Beta is being presented in the media and at conferences suggests that it is the next big thing since electricity and sliced bread. The truth, however, is that Alternative Beta has always been around, although under a different name. Below I will explain this comment further.
“Alpha-beta thinking” is based on factor models. A factor model aims to link the return on a fund to a number of risk factors. Given the relevant risk factors and the fund’s track record, the fund’s sensitivity to the risk factors is estimated by some form of regression analysis. The resulting sensitivity estimates are subsequently referred to as the fund’s “betas” and the part of the average return that cannot be explained by these betas as the fund’s “alpha”.
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[…] We have been reading your blog with interest and we think that we might also be able to add some thoughts on the discussion about alternative beta. We also think that our view is quite different from the hedge fund replication group and Harry Kat’s view on the subject. […]
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