Desperately Seeking Alpha

1
Desperately Seeking Alpha

• Alpha in SA

2
Alpha Excess Return?

• Choice of benchmark (i.e. beta) is the first
  active decision
• There appears to be a communication gap between
  investment objectives, mandates, benchmarks and
  even houseview
• Inappropriate benchmarks in SA create both
  positive and negative alpha opportunities but
  much of this alpha is achieved inadvertently

3
Alpha Skill?

• Alpha should be result of holding favourably
  valued stocks that tend, on average, to very
  slightly outperform the market (benchmark?) on a
  day-to-day basis, and accrue bit by bit over the
  medium-to-long term it should not be confused
  with random noise on a day-to-day basis
• Most fundamental research focuses on the stock-
  and industry-specific aspects of investment, with
  very little attention paid to benchmark-relative
  investment and/or attribution aspects. This can
  also add unintentional alpha, or destroy expected
  alpha

4
Alpha Clever quants?

• If performance is measured on a risk-adjusted
  basis, alpha may be gained from risk reduction,
  not just return enhancement
• Only a few stocks (i.e. gold shares) have a
  slightly negative beta depending on the relative
  index
• Bear hedge funds would take significant short
  positions in the market, and thus establish
  negative betas. These funds can be expected to
  predictably and continually gain as the market
  declines, and to predictably and continually lose
  as the market advances