CAPM / Alpha Theory

What is Right & What is Wrong With the Sharpe Ratio?

Jul 30th, 2014 | Filed under: CAPM / Alpha Theory, Risk management, Today's Post

Despite what the title (Deflating the Sharpe Ratio) might cause a naïve observer to suspect, de Prado's recent presentation was more pro than con the ratio in question. Mend it, don't end it.


A Challenge to Bayesian Probability

Jul 23rd, 2014 | Filed under: CAPM / Alpha Theory, Performance, Analytics & Metrics, Today's Post

The stakes, for mathematics, finance, and the overlap of the two, are pretty high. So my ears pricked up when I heard of a sweeping challenge to Bayesianism.


Winner Takes All, and Liquidity Takers Win

Jul 22nd, 2014 | Filed under: Academic Research, Algorithmic and high-frequency trading, CAPM / Alpha Theory, Derivatives, Today's Post

It does appear that speed is helpful in generating alpha. How is it helpful? Here there are two views, and the less HFT-friendly of these views has received some scholarly/empirical support.


GMI Numbers-Crunching Predicts Stock Returns

Jun 30th, 2014 | Filed under: Alpha Strategies, CAPM / Alpha Theory, Performance, Analytics & Metrics, Today's Post

Starting with 350 available metrics of corporate governance and/or forensic accounting, GMI Ratings has boiled their model down to just 64, and from those they get three scores.


Remembering Enron and Contending with Warren Buffett

Jun 17th, 2014 | Filed under: Alpha Hunters, Alpha Strategies, CAPM / Alpha Theory, Today's Post

An aphorism of Warren Buffett's once again making the rounds can be understood in at least three distinct ways. Faille looks at the possible constructions and decides that, whatever exactly Buffett meant to say or do, his reasoning here does little harm to his target, modern finance theory.


Europe’s Valuation Practitioners Say: To Heck With Theory

Jun 3rd, 2014 | Filed under: Asset pricing, CAPM / Alpha Theory, Today's Post

A recent survey of firm-valuation experts from 10 European countries indicates that they can produce wildly different values given the same inputs. Okay: maybe that’s not too surprising. Any valuation model will necessarily include parameters that will in turn require a best-guess approach, often as subjective in inspiration as it is objective in aspiration. So […]


Quantifying Alpha for Private Equity: Four Approaches

Mar 30th, 2014 | Filed under: Alpha Strategies, CAPM / Alpha Theory, Private Equity, Today's Post, Venture capital

I admire a new "direct alpha" approach to measuring the success of PE portfolios. So will anyone who has had to tell a friend or loved one, "just come out and ask me please!"


Would-be Error Detectors: Suit Up

Feb 18th, 2014 | Filed under: Book review, CAPM / Alpha Theory, Risk management, Today's Post

That gadfly of financial modelers and quants is back. This time, Taleb writes in such a way as to establish that he isn't a mere popularize/diluter of familiar academic arguments -- which is how the critics of many of his earlier books have painted him. And them.


Investors Must be Bribed: An Inquiry into Options and Skewness

Jan 5th, 2014 | Filed under: CAPM / Alpha Theory, Derivatives, Today's Post

A recent paper on "Option Implied Volatility, Skewness, and Kurtosis and the Cross-Section of Expected Stock Returns" finds a positive relationship between each of the three listed characteristics of a distribution on the one hand and ex ante expected returns on the other. In the case of skewness in particular, this finding struck me as a bit odd.


Not All that Sparkles Is Gold: A Word on Platinum

Oct 9th, 2013 | Filed under: CAPM / Alpha Theory, Commodities, Hard metals, Today's Post

A new paper addresses a group of industrial metals, the platinum group, and suggests that its components might be a wise addition to many portfolios on CAPM grounds.


Axioma on those Low-Vol Picnic Baskets

Jul 25th, 2013 | Filed under: Alpha Strategies, CAPM / Alpha Theory, Indexes, Today's Post

The success of low-volatility strategies has been noted in the literature at least since the mid-1970s, with the publication of a seminal work by Haugen and Heins. And such strategies continue to prove successful today. Why do they still work? Why don't the excess profits draw in the bears, consuming all the picnic baskets, driving profit levels down to normal?


Stop Loss (and Gain) Rules as Alpha Generators

Jul 15th, 2013 | Filed under: Academic Research, CAPM / Alpha Theory, Today's Post

A strategy based largely on stop-loss and stop-gain rules, one that uses such rules as the sole means of shifting assets from one asset class to another, can earn statistically significant CAPM alpha, according to a provocative study from the University of Arizona.


Doing Penance for the Draw-down

May 20th, 2013 | Filed under: Alpha Strategies, CAPM / Alpha Theory, Performance, Analytics & Metrics, Today's Post

Under standard portfolio theory assumptions, it takes three times longer to recover from the maximum draw-down for a particular strategy than it does to get there. Fortunately, those assumptions seem to be wrong in a way that allows for a more rapid return to a high water mark.


A Reductionist View of BAB, Debunked

May 12th, 2013 | Filed under: Alpha Seekers, Alpha Strategies, CAPM / Alpha Theory, Timely Research, Today's Post

Asness, Frazzini and Pedersen produce data indicating that over a long period in the U.S., a regular bet-against-beta strategy, one not designed either to accentuate or to eliminate differences among the different industries represented in the portfolio, earned CAPM alpha of 0.73.


A Bayesian Rethinks CAPM

May 7th, 2013 | Filed under: CAPM / Alpha Theory, Today's Post

A portfolio becomes optimal by virtue not merely of what assets are in it, but by virtue of what is paid for each. Examining the implications of that point, Professor Johnstone finds a "logical circularity built into the CAPM equilibrium pricing mechanism."


A Long-Dead Mathematician and Some Very Lively Problems

Apr 23rd, 2013 | Filed under: CAPM / Alpha Theory, Timely Research, Today's Post

D.J. Johnstone of the University of Sydney Business School tells us that if we understand Bayesian probability theory, we'll see that even a very informative signal can bring an increase in uncertainty, thereby raising the cost of capital. This is at least a little bit counter-intuitive, offending the verities about how wonderful is transparency.


Idiosyncratic Risk Puzzle Solved: Not All Investors Are The Same

Nov 20th, 2011 | Filed under: Alpha Strategies, CAPM / Alpha Theory, Performance, Analytics & Metrics, Today's Post

Intuition (codified by many models) suggests that investors have to be bribed to accept risk, so that there ought to be a positive link for any given class of security between the amount of risk, and thus the measurement of volatility, on the one hand, and expected return on the other. A puzzle arises, then, from empirical research indicating that “idiosyncratic” volatility, that is, the volatility due to the characteristics of a specific security, is negatively correlated with return once one passes the mid-point of the range of volatility.


Sibling Rivals: CAPM versus The Risk Parity Portfolio

Aug 16th, 2011 | Filed under: CAPM / Alpha Theory, Hedge Fund Industry Trends, Hedge Fund Operations and Risk Management, Institutional Investing, Performance, Analytics & Metrics, Today's Post

By Christopher Faille A presentation by Samuel Kunz, chief investment officer of the Policeman’s Annuity and Benefit Fund, Chicago, to the CFA Institute 2011 Asset and Risk Allocation conference addressed the pros and cons of “risk parity.”  His presentation makes it seem that risk-parity portfolios (RPP) and the Capital Asset Pricing Model (CAPM) are sibling […]


How well does your hedge fund hedge?

Jul 5th, 2011 | Filed under: CAPM / Alpha Theory, Hedge Fund Operations and Risk Management, Today's Post

A perfectly "hedged" fund is one which has no downside risk. Its payoff relative to the market or some other benchmark is the same as that of the fund plus a put option that provides protection against the downside. In the real world...


Alpha not “dead” – just not always better than beta (as long as you’re sure about the future direction of markets of course)

May 1st, 2011 | Filed under: CAPM / Alpha Theory, Today's Post

A recent research note concludes that alpha (as a performance measure) passed away recently after along battle with beta-tosis and several other ailments. But wait! Did Alpha's nose just twitch?


The Interaction of Demand and Supply Curves for Alpha

Apr 20th, 2011 | Filed under: CAPM / Alpha Theory, Today's Post

If only the marketplace for alpha fit neatly into a model from an Economics textbook.


New spin on the Fundamental Law of Active Management finds US mutual funds were “a victim of their own success”

Mar 31st, 2011 | Filed under: CAPM / Alpha Theory, Real Estate, Today's Post

Finally, a version of the Fundamental Law that fundamental managers can actually use. But be forewarned, if you're a fundamental mutual fund manager, you won't like what it has to say...


The “Most Diversified Portfolio”

Mar 27th, 2011 | Filed under: CAPM / Alpha Theory, Today's Post

Think your basket of thousands of stocks is the most diversified portfolio possible? Maybe not...


Study finds that factor timing isn’t actually a huge source of hedge fund alpha

Mar 16th, 2011 | Filed under: CAPM / Alpha Theory, Today's Post

In the never-ending search for the source of hedge fund alpha, some have looked to factor timing. But a new study suggests that this, like many other possible explanations, falls short of explaining the hedge fund secret sauce.


Managers operating in mature and “efficient” markets rejoice! Study finds you too can generate alpha.

Feb 22nd, 2011 | Filed under: Academic Research, CAPM / Alpha Theory, Today's Post

Thought managers in "inefficient markets" like emerging markets or small cap equities had the advantage when it comes to alpha-generation? Maybe not...


Institutional ownership nears all-time highs. Good or bad for alpha-seekers?

Feb 2nd, 2011 | Filed under: CAPM / Alpha Theory, Today's Post

If a recent study of French institutional investors can be applied to a recent report on US equity markets, alpha opportunities abound for years to come.


Study finds private equity “four-peats” can be more difficult than previously thought

Jan 19th, 2011 | Filed under: CAPM / Alpha Theory, Today's Post

Success breeds success – and expectations of continued success. Except in private equity, where success bodes reversion to the mean, a recent study on performance persistence argues.


Mutual funds with far-away holdings found to mimic hedge funds

Jan 11th, 2011 | Filed under: Academic Research, CAPM / Alpha Theory, Today's Post

A transnational study of mutual funds sheds light on one of the secrets of hedge funds' overall success.


Pop Quiz for Long/Short Equity Investors: When does a high “up-capture” not cost you a commensurately high “down-capture”?

Dec 7th, 2010 | Filed under: CAPM / Alpha Theory, Today's Post

The dream long/short equity fund is one that has a high market "up-capture" with little or no market "down-capture". But how do you find your dream fund when up-capture and down-capture fluctuate all the time? Here's one innovative idea...


Finding money where there’s no liquidity

Nov 17th, 2010 | Filed under: CAPM / Alpha Theory, Today's Post

Retail and high net worth investors can now gain access to hedge funds through a number of more liquid vehicles. But is their liquidity one of the very reasons their performance may be lower?


Hubbert’s Peak: Is the world running out of “cheap alpha?” If so, here’s an idea…

Nov 12th, 2010 | Filed under: CAPM / Alpha Theory, Today's Post

The search for alpha is much like the search for oil, prompting us to muse a few years ago about whether there was going to be a Hubbert’s Peak in alpha. But regardless of whether the world is running out of “cheap alpha,” the process of refining crude returns into something that can power your […]


Stock-picking alpha in a life or death struggle?

Oct 31st, 2010 | Filed under: CAPM / Alpha Theory, Today's Post

With stock dispersion at all-time lows, is the art of stock-picking dead or just napping?


Downer for hedge fund managers: Apparently you have no skill, talent or alpha

Oct 6th, 2010 | Filed under: CAPM / Alpha Theory, Today's Post

A recent academic study finds that hedge fund managers has "zero" ability to put their market timing skills to proper use and produce alpha.


Modern Portfolio Theory: Break free dude!

Aug 12th, 2010 | Filed under: CAPM / Alpha Theory, Today's Post

Modern portfolio theory, the hallmark of institutional investing, isn't so modern anymore, according to a new report by State Street that encourages embracing new types of risk models and investment options.


New factor on the block: Research suggests you don’t need alternative investments to get an “illiquidity premium”

Aug 2nd, 2010 | Filed under: Academic Research, CAPM / Alpha Theory, Today's Post

Move over "momentum factor", there's a new kid in town and it's one that is familiar to the alternative investment industry.


Study finds market “under-reaction” to Buffett’s 13F filings, proposes trading strategy to exploit it

Jul 28th, 2010 | Filed under: Academic Research, CAPM / Alpha Theory, Today's Post

In an age where hair-trigger investors exploit information in nanoseconds, here's a trade you can apparently take your sweet time to make.


Capturing Political Alpha

May 23rd, 2010 | Filed under: CAPM / Alpha Theory, Today's Post

Here's another reason to count domestic and geopolitics as betas.


When is alpha not really “alpha”? When it’s “beta-alpha.”

May 12th, 2010 | Filed under: Academic Research, CAPM / Alpha Theory, Today's Post

A paper by a pair of institutional investment consultants challenges the notion of a "stock-picker's market" and finds that "beta-alpha" is the real source of returns - at least for US large cap managers.


What NASCAR Can Teach Us About Return Persistence

Apr 28th, 2010 | Filed under: Academic Research, CAIA Alternative Viewpoints Columns, CAPM / Alpha Theory, Guest Posts, Today's Post

At the very least, NASCAR and Formula One share two things in common with the alternative asset management industry...


The Five Faces of Alpha (II): “True” alpha reveals itself

Apr 7th, 2010 | Filed under: CAIA Alternative Viewpoints Columns, CAPM / Alpha Theory, Hedge Fund Industry Trends, Today's Post

Today we bring you part 2 of Erik Einertson’s special to AllAboutAlpha.com “The Five face of Alpha”  (first installment here)… Alpha #2: Insurance Beta The second type of “Alpha” often found in the market can be referred to as insurance beta or Informationless Investing (Weisman 2002). This type of exposure has persistent tilts towards strategies […]


The Five Faces of Alpha

Apr 6th, 2010 | Filed under: CAIA Alternative Viewpoints Columns, CAPM / Alpha Theory, Today's Post

As we have noted over the past several years, alpha is notoriously difficult to define and isolate since its existence depends not only on the target being observed, but on the perspective of its observer.  The more we study alpha, it seems, the less we know about it. We are reminded of this irony by […]