Andrew Lo of MIT-Sloan addressed that idea in an article titled “Is Alpha Just Beta Waiting to Be Discovered?”…check it out…very thought provoking.

EDP

Lots of portfolio managers, for example, believe that they find alpha thru some combo of momentum, low P/Es and low Price/Book. But every one of those is an enduring factor of risk in the market, sometimes with positive returns, sometimes with negative returns.

We saw that in 07 when MANY so-called “quant” strategies, all following similar strategies to the factors listed above, simultaneously had to crank up the “Dear Client” letters describing how their Alpha strategies turned into negative-four-sigma (extremely unfortunate beta) events.

With a little bit of timing of these strategies, one might actually generate something that looked like alpha… say, if a manager thought her position was a little crowded and some deleveraging might be kicked off by a competitor with similar positions… and then got back in again after her correct market timing call. (And yes, even fairly simple market timing, if endowed with a fair run of luck, looks JUST like alphas, too. Just that most PM’s, I’ll guess, don’t much engage in it.)

The above thesis (no claims of proof, just an idea to kick around) would dovetail nicely with the systematic way that modern investment managers and hedgers operate these days. It’s the beta!