Mommy, Where do alphas come from?
May 15th, 2007 | Filed under: CAPM / Alpha Theory, Performance, Analytics & MetricsAh, the question every parent dreads. Where do alphas come from? How can you possibly explain such a complex and miraculous process that has given life to asset managers since time began?
Thankfully, MIT’s Andrew Lo just released a new paper entitled “Where Do Alphas Come from?: A New Measure of the Value of Active Investment Management”. In it, Lo proposes a new way of measuring alpha that addresses this age-old question (hat-tip to The Beta Brief for calling the AllAboutAlpha tip line with this one).
(Lo, by the way, scored his own chapter in Peter Bernstein’s new book Capital Ideas Evolving. Much more on this book in the coming days as we wade through it here at AllAboutAlpha.com world headquarters.)
Traditional (CAPM) measures of active management have relied on the extent to which a fund is correlated to its benchmark. Then in 1992, William Sharpe took this notion a step further by regressing mutual fund returns against not just a fund’s own benchmark, but against several passive indices.
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[…] All About Alpha has a closer look at a paper that answers “where alphas come from.” […]
[…] Maybe I’m working too much. But the more I research alpha, the less I know how to define it. While Andrew Lo asks “Where does alpha come from?”, I’m now back at “What is alpha”?  For example, what might look like alpha over one timeframe is actually “exotic beta” when you shift the window of analysis only a few months. What looks like alpha vs. one benchmark may, of course, be beta when compared to a different benchmark. There’s ”active weight“, “active component“, “active share“, “absolute returns”, “reliance on public information“, “manager value-added” - even ”accidental alpha“. […]