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Browse by CategoryHome » Category List » Alpha Theory
French fries active management16 June 2008
Immediate benefits of active management Institutions have increased their allocation to passive investing significantly over the past 20 years, prompting Advisor Perspectives to wonder if institutions wising up to high active management fees. Interestingly, French points to increasing institutional hedge fund allocations as evidence that they are not, in fact, becoming more passive after all:
Comments »Academic rains on weather/return correlation parade29 May 2008In our monthly column featuring the thoughts of a member of the Chartered Alternative Investment Analyst (CAIA) Association, we feature an active publisher in highly rated journals who has recently written an article on weather variables and their impact on financial markets. Wessel Marquering, Ph.D., CAIA, is quantitative researcher at the Talergroup. Marquering and fellow researcher Ben Jacobson wrote an interesting paper on weather and financial markets for the Journal of Banking & Finance. What follows are Marquering’s thoughts on the promise and peril of trying to extract alpha from the weather. Alpha in the Weather: Alternative Viewpoints, powered by CAIA
As readers of this website are no doubt aware, weather derivatives trading is taking off - with trading volumes going through the roof and more hedge funds venturing into this space. Basically, a weather derivative is a financial product in which two parties agree to exchange cash flows determined by reference to a weather index. The reference indices include temperature, rainfall, wind speed, humidity, snowfall, to name a few, but the most heavily traded contracts are based on temperature indices. On the one hand, weather derivatives can be used to manage risk, by insuring for example farmers against a bad crop, as an insurance against bad weather on holidays, by decreasing the exposure to temperature-related risk factors, etc. On the other hand, they have become a relatively new way to generate alpha.
Comments »A “small-cap bias” in hedge funds themselves?21 May 2008
Earlier this week, the company announced the updated results of the same study. It came as no surprise to researchers that last year’s findings were reinforced. Young funds and small funds did better than their larger and older cousins. The chart below appears in the firm’s press release:
You don’t need to be a finance Ph.D. to see the parallels between this research and the work of Eugene Fama and Kenneth French on the “small-cap bias”. Apparently, small cap stocks aren’t the only small things that tend to outperform.
Comments »Report: “Exposure yardsticks may provide little insight about a fund’s alpha potential”15 May 2008
A research paper by Morgan Stanley (available in the Morgan Stanley research dossier at AllAboutAlpha.com) reminds us that dollar-weighted exposure is not synonymous with beta-weighted net exposure. But the paper, another in a series by Marty Leibowitz and Anthony Bova, also argues that the beta-weighted net exposure doesn’t really tell us a lot about the potential information ratio (alpha/tracking error) of the fund. To gauge the potential IR of a fund, one should instead look at the ratio of “active” long positions to “active” short positions - or what Leibowitz and Bova call the “active ratio”. The active ratio, they argue, is more descriptive of the risk/return dynamics of a fund than the more recognized dollar-weighted or beta-weighted net exposure. They say the Active Ratio can reveal how long/short funds and 130/30 funds are really just first cousins:
Comments »Does “Sentiment Beta” beget “Sentimental Alpha”?14 May 2008
Behavioral finance has often been touted as the successor to the CAPM since it aims to explain how the grand old model doesn’t hold up under empirical analysis. Unfortunately, behavioral finance has so far lacked a unifying theory of its own capable of galvanizing the field of finance. Still, Baker and Wurgler borrow from the lexicon of the CAPM to propose a measure they call “Sentiment Beta”. As P&I points out, some big names have taken notice. Bruce Jacobs of Jacobs, Levy tells the newspaper:
At first blush, “sentiment beta” sounds kind of redundant. After all, doesn’t beta itself capture market sentiment? If sentiment rises, the market rises. And if the market rises, high-beta stocks rise anyway, right?
Comments »Research puts price on hedge fund “illiquidity premium”6 May 2008Liquidity (or lack thereof) is a perennial issue in the hedge fund industry. How much should investors expect to be compensated for the lock-ups that hedge funds often require? And does such a premium really count as “alpha”? Pierre Laroche of Innocap Investment Management (see related posting on Innocap’s hedge fund replication work) tells us of a study he recently conducted that comes to a pretty definite conclusion about the illiquidity premium. Laroche is the co-author of three books on derivatives and risk management.
Much has been done in recent years to better measure and price illiquidity. These developments had a positive impact on risk management practice. For example, some interesting liquidity-adjusted VAR models have been developed recently. There has also been quite a bit of discussion on this topic on the pages of AllAboutAlpha.com (e.g. “Liquidity Alpha“, “Liquidity Insurance“) At Innocap, we recently finished an interesting study that proposes a way to quantify the cost of illiquidity and adjust the risk-return profile of an illiquid asset. Our model aims at reproducing the trading methods and market environment of typical (median) CTA hedge funds. (We could have chosen other types of hedge funds. This one is used for illustrative purposes only). The model integrates the impact of liquidation delays, accrued bid-ask spread (BAS hereafter) and increased volatility (feedback effect). This is an improvement over other models, which only take into account one or two of these factors.
Comments »Google, efficient markets and box lunches with Bill Sharpe9 April 2008
This week, it contains an interesting piece by a fee-only portfolio manager that recounts the story of how the founders of Google educated their soon-to-be rich pre-IPO employees on how to stay rich post IPO. But while the story is presented as an endorsement of efficient markets, it may actually raise as many questions as it answers about the battle between active and passive management. Says the article:
Comments »Skeptics to hedge fund managers: Your alpha has been faked!3 April 2008
Now Wharton’s Dean Foster and Peyton Young of Oxford University and the Brookings Institution have added to the manager-as-scammer literature with a new paper entitled “The Hedge Fund Game: Incentives, Excess Returns and Piggybacking“. In it, they decry the proliferation of “fake alpha” (e.g. selling options and using the wrong benchmark to calculate alpha). The paper was published in January, but didn’t start making serious waves until mid-March when Martin Wolf, Chief Economics Commentator at the Financial Times wrote a column about it. Wolf points out the asymmetry inherent in any type of incentive fee and holds up the Foster/Peyton paper as a “beautiful” example of how incentive fees can be gamed. He says that such a structure bears a resemblance to the used car industry. Like the used car industry, he says the hedge fund industry “is bound to attract the unscrupulous and unskilled.” [Ed: We’re reminded of the famous Forbes cover story on hedge funds in May 2004 ”The Sleaziest Show on Earth“]
Comments »Alternative Viewpoints: Sustainable Hedge Fund Performance31 March 2008Every year, pure random chance dictates that exactly half of all investors will outperform the median and half underperform the median. The Holy Grail of alpha generation, of course, is to outperform more than pure random chance should allow. In other words, to produce persistent alpha. In our monthly column featuring the thoughts of a member of the Chartered Alternative Investment Analyst (CAIA) Association, we feature one academic who may have identified a way to uncover such non-random outperformance. Daniel Capocci, Ph.D., CAIA, is a senior portfolio manager at KBL European Private Bankers, a lecturer at the Luxembourg School of Finance and a Research Associate at the Edhec Risk & Asset Management Center. Alternative Viewpoints, powered by CAIA
Three fields exist that examine hedge fund performance. The first includes studies that compare the performance of hedge funds with equity and other indices (some authors conclude that hedge funds are able to outperform these indices, whereas others are more cautious in their conclusions). The second field of hedge fund performance analysis compares the performance of hedge funds with that of mutual funds (where some have found that hedge funds constantly obtain superior performance to mutual funds, although lower and more volatile returns than the reference market indices considered.) Finally, the third group of hedge fund performance analysis examines the persistence of hedge fund returns. Persistence is particularly important in the case of hedge funds because the hedge fund industry has a higher attrition rate than mutual funds.
Comments »New Study: No hedge fund bubble…but a potentially serious capacity constraint30 March 2008
This is kind of ironic given that the industry seems to obsess over the “non-normality” of hedge fund returns. While fund and sub-strategy returns may be non-normal, there often seems to be an implicit assumption that alphas follow a bell curve. Thus, when hedge funds underperform, we assume that all hedge funds underperform - that the bell curve simply shifted to the left. But Zhaodong Zhong of Penn State University wondered if the averages hide a more complex explanation. His new study examines the performance of individual hedge funds to determine if average hedge fund alpha has fallen a) due to more unskilled managers (the “hedge fund bubble” hypothesis) or due to less superstars (the “capacity constraint” hypothesis). (Hat tip to blogger Paul Kedrosky for bringing this paper to our attention).
Comments »The End of (asset management) History?12 March 2008
To a great extent the history of investment management (at least, since Markowitz) can be described as similarly bipolar struggle - this one between active and passive management. Efficient market theorists would argue that the final pitched battles between the two sides are being fought in the mutual fund and ETF industries - with ETF’s destined to triumph. However, proponents of active management point to the hedge fund industry as proof that active management is not only alive and well, but is consolidating its forces. Are either of these the final epic battles in the history of asset management? A couple of news items yesterday suggest the balance of power is tilting toward the efficient market theorists. First, Mark Hulbert writes about Kenneth French’s latest paper, “The Cost of Active Management” in the New York Times. As far as we can see, the paper has not yet been released to the public. So Hulbert’s interpretation is all we have to go on for now.
Comments »Alternative Viewpoints: “Liquidity Insurance”3 March 2008In December, guest contributor Ranjan Bhaduri, CAIA examined the cost of liquidity by using a simple exercise that he called the “balls in the hat game”. Bhaduri argued that illiquidity - a source of excess return - is often confused with “true alpha”. Today Konstantin Danilov, CAIA, of Bank of America proposes a new type of security that could be used to hedge against the possibility of an illiquidity crisis. Danilov conducts buy-side manager research at BofA. Prior to this, he was a trader at Cantella & Co. He is also a member of the Program Subcommittee for Alternative Investments and Hedge Funds of the Boston Security Analysts Society. His guest contribution below is the latest in a monthly series featuring members of the Chartered Alternative Investment Analyst (CAIA) Association. “Liquidity Insurance”
“Our current system of levered finance and its related structures may be critically flawed. Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.”
Liquidity is a topic that is brought up often in the wake of a financial crisis. The crash of 1987, LTCM, Amaranth, and the current sub-prime crisis are all examples of the devastating impact of illiquidity. Unfortunately, it is a factor that eludes the most risk management tools and risk/return models in modern financial theory. For example, Value-at-Risk (VAR) and “portfolio insurance” largely ignored illiquidity (or “assumed” it away) and we were left with the consequences.
Comments »Why the common expression “all correlations go to one” may be overstated28 February 2008
Since 1987, the term “correlations go to one in times of stress” has become axiomatic in financial markets. But does research actually back up his common assumption? In a January research note to clients (“Stress Risks within Asset and Surplus Frameworks” – available here at AllAboutAlpha.com with free registration), Morgan Stanley’s Marty Leibowitz and Anthony Bova take a good hard look at this phenomenon. According to their report:
Comments »Does the “wisdom of crowds” produce alpha?10 February 2008
One panel that raised a lot of interesting questions about the nature of alpha was a panel discussion on “Collective Money Management”. For the uninitiated “collective money management” refers to networks of investors who pool their ideas together to come up with what is hoped to be the best trades. Call it Facebook meets E*Trade I suppose. Examples include Marketocracy, PredictWallStreet, Zecco, Cake Financial, Socialpicks.com, and Covestor. These web sites were billed in the official programme as being the “antithesis” of the stock market – places where people freely share ideas in the hope that they will benefit by association with the network. But while many emerging open source business models can seem counterintuitive, the idea that investors want to share their ideas isn’t realy counterintuitive or antithetical at all. In fact, it’s in perfect keeping with the spirit of the market. If an investor buys an undervalued stock, it’s actually in his best interests to tell others about his thesis since this will put upward pressure on the stock.
Comments »Paper revisits what it means for a manager to be truly “active”5 February 2008
Unfortunately, things may not be that simple. A manager can pursue a passive strategy using a concentrated, yet representative sample of index names. Thus, security weightings would differ from index weightings, but the fund would perform very much like the market. Similarly, a fund can have security weightings that are similar to those of the index when the market is rising and different when the market is falling. Catch the fund at the wrong time and it would look passive. Mustafa Sagun and Scott Leiberton of Principal Global Investors make the case for adding holdings-based analysis to traditional measures of “activeness” in this December 2007 paper (”Alpha Dynamics: Evaluating the Activeness of Equity Portfolios“). Say the duo:
Comments »Research finds most equity indices actually contain alpha28 January 2008
Andrew Lo provided some arguments in favour of such an index in his December 2007 paper “130/30: The New Long-Only“. In it, he acknowledges:
According to a paper published in the January 2008 edition of the Journal European Financial Management, the “passive buy and hold ethos of indexation” ain’t so passive after all. The paper (earlier version available here), finds that most indices are chalked full of active biases - making a truly passive index a rare animal indeed. This, of course, is the central argument made by proponents of fundamental indexation (see related posting, “Arnott: Does My Beta Produce Alpha?”)
Comments »Betting on the Super Bowl? Read this report on “NFL Alphas” first.13 January 2008
The article goes by the unwieldy title “Evidence of Betting Market Intra-Season Efficiency and Inter-Season Over-reaction to Unexpected NFL Team Performance”, but can probably be summarized as simply “Don’t Fall for the Darlings”. Sapra compares the expected results of over 4,000 regular season NFL games (based on the point spread) with the actual results of each match-up. If the NFL wager market is perfectly efficient, the actual results should be randomly distributed around the predicted results. In other words, a “fair” point spread means that the marginal bettor is ambivalent between taking either side of a bet - in the same way that the marginal investor should be ambivalent about paying the “fair” price for a security.
Comments »Bookstaber’s pre-boarding call for the “flight to simplicity”10 January 2008
The labor of love now has 55,000 copies in print and has received accolades from The Economist, Business Week, Forbes, and (most prestigious of all) AllAboutAlpha.com. Bookstaber was in Toronto earlier this week addressing a sold-out event organized by AIMA (The Alternative Investment Management Association). I had the chance to join him for dinner before his speech and found him to be a casual and disarming kind of guy who is equally comfortable discussing championship dog breeding as he is dispensing sapient advice on the global financial system. He gives credit to others - particularly an editor at The Economist - who have recently advocated a “flight to simplicity” for adroitly summarizing the main idea behind his book. Bookstaber basically says that one can’t fight complexity with more complexity. Adding ever more complicated financial regulations can (and will) have unknown and unintended consequences for the functioning of capital markets.
Comments »“Homemade Hedge Funds”: Delicious but deadly?8 January 2008
But most of the debate surrounding “hedge fund replication” has involved the use of futures, swaps, mechanical trading strategies, derivatives. But most investors simply don’t have these tools lying around at home. So an asset manager and an academic from Howard University recently teamed up to see if you could actually replicate hedge fund returns using the most common of household appliances - the sector ETF. In “Homemade Sector Hedge Funds: Can Investors Replicate the Returns Without Paying the Fees?” Lorenzo Newsome of Xavier Capital Management and Pamela Turner of Brown University say this has never actually been tried before. (Their paper appears in this quarter’s Journal of Investing and can also be downloaded here.) Say the duo:
Comments »New paper explains “muted demand” for portable alpha3 January 2008
By this standard, Larry Gorman is a name to watch. The Cal Poly professor has a unique ability to come down from the ivory tower to help the rest of us get our head around the pressing academic issues of the day - the Fundamental Law of Active Management, 1X0/X0, and the true meaning of alpha, for example. But don’t take our word for it, Gorman has been named “Most Outstanding Faculty” in the Cal Poly finance department each of the past fours years. Gorman recently teamed up with professor Robert Weigand of Washburn University to write this relatively easy to digest paper covering some of the roadblocks on the path to alpha-centric investing (called “Measuring Alpha Based Performance. Implications for Alpha Focused, Structured Products”). Warn the duo:
Comments »More on how the ivory towers grow so tall27 December 2007The investment returns of university endowments remained a hot topic throughout 2007. And their managers, such as Yale’s David Swensen, often make it into Halls of Fame of the investments world. However, little is known of the goose that lays the endowments’ golden eggs. While in Boston at the “unnamed absolute return event” earlier this year (see related posting), we saw a presentation by Cristian Tiu of the State University of New York (SUNY) at Buffalo. Tiu, together with his co-authors Keith Brown and Lorenzo Garlappi, had something to say about this fabled goose. He also brings a real-world perspective to his research from previous work at The University of Texas endowment (UTIMCO). The Troves of Academe – or how university endowments make their money
In a recent paper, my colleagues and I asked what is, and then what explains the performance of university endowments. We found that while the average endowment performance across the years has been around 10%, the risk adjusted returns (or alpha) are not statistically significantly different from zero. Exposure to momentum stocks seems to be the main driver of the returns. Once this is accounted for, endowments don’t seem to have – on average - any alpha producing capabilities. However, some endowments obviously perform better than others. Why? To begin with, all endowments are relatively unconstrained, tax exempt and large enough to hold different asset classes; they are near academic centers; and there is a huge volume of academic literature on asset allocation. Hence asset allocation seems to be one of the first things to look at as a possible determinant of performance. But can asset allocation itself generate alpha? We found that the passive hedge fund index we used to benchmark the performance of hedge funds as an asset class has positive and significant alpha. Therefore, an endowment invested 100% in hedge funds really should have generated alpha. So if asset allocation is “smart” enough, it could generate alpha by itself. But does it? Is their asset allocation “smart enough”? And does it help performance?
Comments »Home of original “black swans” found to have smallest population of the statistical variety18 December 2007
Statisticians also have their own take on the phrase “The only thing constant is change itself.” As author Nassim Nicholas Taleb (see related posting), mathematician Benoit Mandelbrot (see related posting) and others have shown change itself is actually inconsistent. In other words, volatility is volatile. And so you never really know the likelihood of extreme events. Spanish academic Javier Estrada brings these two concepts together in this November 2007 article on what Taleb has called “black swan events” (in reference to the previously unfathomable discovery of black swans in Australia over 300 years ago). Black swan events (the subject of Taleb’s best-selling book) cannot be explained by the commonly-made assumption that random events, such as stock market movements, followed the familiar bell curve (normal distribution). Estrada applies this thinking to 15 equity markets around the world. He calculates the returns from the best and worst 10, 20, and 100 trading days. Then he calculates the returns a passive investor in those markets would have received if they had missed out on these small groups of trading days. Estrada’s findings confirm the existence of black swans:
Comments »Man Group CEO on lock-ups and alpha…5 December 2007
This might surprise players of the balls-in-the-hat game because while lock-ups do bring more returns (ceteris paribus), it’s not likely “alpha”. Instead, it’s more likley just a fair market compensation for locking yourself up and throwing away they key. In fact, Clarke didn’t actually say lock-ups “will bring institutions more alpha”. According to Thomson, he actually said:
Comments »Alternative Viewpoints: “Liquidity Alpha”27 November 2007ALTERNATIVE VIEWPOINTS …powered by CAIA As part of our on-going series of features written by holders of the Chartered Alternative Investment Analyst (CAIA) designation, we are pleased to bring you this piece by Ranjan Bhaduri, Ph.D., CFA, CAIA. Dr. Bhaduri is Vice President in the Graystone Research group at Morgan Stanley. Prior to this, he was with a multi-billion dollar capital management firm where he was involved in all aspects of its fund of hedge funds and structured finance business. He has also held advisory roles at the East-West Center, a leading think tank on the Asia-Pacific region and has taught finance and mathematics at several universities. He is the author of several articles on advanced risk management techniques and hedge fund issues and is a member of the American Mathematical Society, the Mathematical Association of America and the Global Association of Risk Professionals. Dr. Bhaduri also serves on the Advisory Council of the World Trade University. Dr. Bhaduri has just returned from a speaking tour that took him from Chicago to London and Beijing where he addressed audiences on the role of liquidity in hedge fund returns. “Liquidity Alpha”
The word “liquidity” gets bandied about quite a lot, but it is surprising how many portfolio managers take a naïve approach to liquidity. It is well known that one should be compensated for investing in less liquid instruments (liquidity premium), but how much? What is the value of liquidity? It is dangerous in merely trust one’s intuition on the value of liquidity. Consider the following one-person game: The “Balls in the Hat Game” The game consists of a hat that contains 6 black balls and 4 white balls. The player picks balls from the hat and gains $1 for each white ball, and loses $1 for each black ball. The selection is done without replacement. At the end of each pick, the player may choose to stop or continue. The player has the right to refuse to play (i.e. not pick any balls at all). Given these rules, and a hat containing 6 black balls and 4 white balls, would you play? (Why?)
Comments »Is there alternative beta in alternative energy?26 November 2007
We found this article in Forbes late last month exemplified the general level of excitement about alternative energy. It cites impressive YTD growth of several alternative energy ETFs such as the US$660 million PowerShares WilderHill Clean Energy ETF (PBW). This makes immediate sense. After all, clean energy is the next big thing, right? It turns out that PBW daily returns have a 64% correlation to the S&P Energy Select SPDRs (XLE), an ETF containing old-fashioned energy companies (calculated using data available at Google Finance). That’s not really that high. Here’s what the one year scatter plot of PBW and XLE daily returns looks like:
Comments »Is previous research on hedge fund performance persistence “biased”?28 October 2007
That much is generally agreed. But for any given period, a large portion of managers beat their benchmarks and a large portion lag their benchmark. In fact, if the benchmark is the average performance of all managers pursuing the same strategy then approximately half of all managers would beat the benchmark and half would lag it simply due to luck - not ability. However, if the manager persistently finds herself on the winning side of the average, then one can likely conclude she has true ability. Being on the winning side twice in a row may not say much. But some managers appear to deliver returns that are as persistent as the sun rising every morning. Thus was born the study of manager “persistence”.
Comments »Q-Group spring 2007 seminar summaries are (almost) all about alpha25 September 2007
Well, no one won a Nobel Prize at last spring’s meeting. But the 17 pages of session summaries, now available here, are well worth a read. Here is a selection of what you’ll find:
Comments »What August says about market neutral funds: not much11 September 2007
In fairness, it’s easy for some to reach this erroneous conclusion. Through a grand game of “broken telephone” involving the industry and the popular press, the impression has been established that market neutral funds must have a low volatility, won’t move in the same direction as the markets, and will act as a hedge against market drawdowns. But all three assumptions are wrong. Market neutral funds aim simply to have a low market correlation and, like all funds, they aim to produce alpha. That’s it. No automatic promise of low volatility, and certainly no promise that they will act as a hedge against a long position in the market. By this standard, market neutral funds - even the stinkers - may have performed entirely appropriately in August after all.
Comments »The Altercation over Indexation26 July 2007
It’s actually a pretty interesting 60 minutes. (Thankfully, even more exciting than the 60 minute SEC meeting we watched earlier this week.) However, if you’re pressed for time, you will find that both Arnott and Sauter make their key arguments in the first 25 minutes (but you will miss Arnott’s taunt in Round 7 when he pointedly asked Sauter, “Why are you so scared of this?” - not quite Jack Nicholson’s “You can’t handle the truth!”, but a high point nonetheless). Whether you make it to the end or not, you will find it’s a great way to get up to speed on the arguments for and against fundamental indexation without having to reading mind-numbing academic papers.
Comments »Sell-side not a bunch of snake-oil salesmen after all11 July 2007
In that study, academics suggested that managers should be measured not against the market portfolio, but rather against the average active bets of sell-side analysts. In essence, these researchers proposed a passive benchmark made up of sell-side analysts’ picks. Any return over that passive benchmark could then be declared as value-added (basically, alpha). The study concluded that managers who stray more from sell-side stock picks were more likely to outperform than those who simply took the sell-side’s advice whenever it was offered. So chalk one up for good old-fashioned internal buy-side research. But the June 23rd edition of The Economist cited a recent study that suggested sell-side advice isn’t so bad after all. The study, by researchers at Harvard and the University of North Carolina concluded that - contrary to popular opinion - sell-side analysts are actually more accurate and less optimistic than their buy-side peers.
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In March, 
Special to AllAboutAlpha.com by: Dr. Wessel Marquering, CAIA, 
If you’re in the hedge fund industry, you know the name Pertrac. These are the guys who make the ubiquitous software platform that many hedge funds use to analyse and report performance to their investors. Last March, the firm compared the performance of large ($500 million+), medium ($100 million-$500 million) and small (under $100 million) hedge funds to see if size determined success in Hedgistan. They also compared the performance of young (under 2 years old), middle aged (2-4 years old) and seasoned (4 years old +) hedge funds.
Whether one is referring to a 1X0/X0 fund or to some other long/short variant like a market neutral fund, there is often an implicit assumption that the “net exposure” provides all the insight required into the return potential of the fund. For example, many commonly assume that 130/30 funds are “beta neutral” and therefore that the “30/30″ portion will generate pure alpha. But what if that short-extension was just offsetting? To use an extreme example, if it was 30% long the S&P and 30% short the S&P, then there would be no alpha.
Pensions & Investments published a 
Special to AllAboutAlpha.com by: Pierre Laroche, Managing Director - R&D Innocap Investment Management 
Much of the focus of this website is institutional (pensions, endowments, portable alpha etc.). But many readers are also financial advisors who realize that many of the ideas adopted by institutions eventually make their way to the world of retail investments. If you are such advisor, there is one online publication to which you should really subscribe: 
Subscribers to our monthly email update “
Special to AllAboutAlpha.com by: Dr. Daniel Capocci, CAIA, KBL European Private Bankers
Several studies over the past few years have suggested that the much heralded “hedge fund alpha” is declining. These studies have examined average hedge fund performance (overall, or funds within a specific strategy). As a result, they have been unable to differentiate between two possible causes of the decline: an increase in the number of unskilled managers who generate negative alpha and a decrease in the number of hot-shots who produce large alphas (essentially, the skew of the hedge fund return distribution). 
In his famous 1989 essay “The End of History?” (
Special to AllAboutAlpha.com by: Konstantin Danilov, CAIA, Bank of America
In his book “A Demon of Our Own Design” Richard Bookstaber describes how the breakdown of basic market physics during Black Monday meant that “all stocks moved together” (
The intersection of finance and technology is getting crowded. Along with information aggregation services and social investing networks, today’s the O’Reilly MoneyTech conference in New York featured celebrity financial bloggers. Barry Ritholtz (
There are (at least) two distinct ways of measuring the extent to which a manager attempts to create value. One is returns-based (alpha, tracking error, information ratio etc.) and one is holdings-based (the delta between holding weights and index weights). Holdings-based measures can provide a discrete snap-shot of a manager’s “activeness” which seems objective and undeniable. After all, if a manager holds positions in wildly different proportions that those in the index, how can his fund be anything other than highly active? 
When Credit Suisse and S&P both recently announced 130/30 “indices”, we 
Although it’s usually obfuscated by complex mathematics and applied only to world of investment management, “alpha” is a remarkably ubiquitous concept with applications that go well beyond the Capital Asset Pricing Model. Steven Sapra, co-author of a recent paper on 130/30 (
It was 8 years in coming. An idea that began as a set of notes back in 1999 slowly and methodically grew over the years to eventually become a manifesto of modern risk management. According to author Richard Bookstaber, “A Demon of Our Own Design” began as a labor of love. It seems that the result represents a sort of catharsis - therapy for a hedge fund insider who has been a first-responder at the scene of some of history’s most calamitous financial crashes. 
As investors attempt to look behind the hedge fund wizards’ curtains to see how they perform their tricks, there is a significant amount of interest in “do it yourself” or “homemade” hedge funds. 
As outside observers of the academic literature surrounding alpha-centric investing, we always find it curious that the easiest-to-read, most accessible papers and presentations are usually written by some of the field’s most accomplished and technically sophisticated members. William Sharpe, Eugene Fama, Andrew Lo, Jacobs & Levy…each seems to be able to cast aside the trappings of academia and present cogent arguments in laymen’s terms.
Special to AllAboutAlpha.com by Cristian Tiu, Assistant Professor, State University of New York (SUNY) Buffalo
Statisticians have a term for 20/20 hindsight. It’s “retrospective predictability” and it refers to the idea that previously unfathomable events often seem as if they were actually predictable once they occurred. In a sense, retrospective predictability is what makes stories of “famous last words” so compelling.
With considerable debate ranging about Ranjan Bhaduri’s “Balls in the Hat” game (
By: Ranjan Bhaduri, special to AllAboutAlpha.com
We’re always on the look-out for new and different market risk factors or betas here at the AllAboutAlpha global headquarters. So with all the talk recently about alternative energy (such as 
By now, most hedge fund investors are aware that absolute, raw returns may not be the best way to judge a hedge fund manager. Many believe that removing betas (whether they be “traditional” or “alternative”) from the equation can provide a more useful indication of manager ability. For them, the question then becomes: did the manager beat their beta benchmark?
As you probably know if you are a regular reader, The Institute for Quantitative Research in Finance” (or Q-Group for short) is one of the world’s foremost communities of quant rock-stars from the academic and practitioner communities. In his 
Alpha Male has been getting a lot of media inquiries recently about why market neutral funds lost money last month. It’s almost as if some of the more skeptical members of the press now smell blood in the hedge fund water. They see that there were market gyrations in August and that some market neutral funds were down. Ergo, market neutral funds aren’t that “neutral” after all. 
Continuing the proud tradition of the “Rumble in the Jungle” and the “Thrilla in Manila“, 
Regular readers may remember an academic study we told you about in April on a method of measuring a fund manager’s ”reliance on pubic information” or RPI (