Analytic Due Diligence Using an Alpha Cost Index

Posted: 6 Oct 2009

See all articles by Sharath M. Sury

Sharath M. Sury

Santa Clara University; University of California

Manda B Sury

DePaul University - Department of Finance

Date Written: April 16, 2006

Abstract

Effective portfolio managers recognize that not all returns are created equally. Investment strategies can deliver returns that are the result of systematic (market or beta) exposures, nonsystematic (skill or alpha) exposures, and random variation. The relative proportions of alpha, beta, and randomness vary across strategies and even within strategies as they evolve over time. Historically, most investment products have bundled alpha and beta. However, as low-cost, investable proxies for beta grow more pervasive, it is increasingly important for portfolio managers to consider only those actively managed products that are truly delivering incremental alpha. In this article, we introduce a new measure that adjusts product fees to account for the level of alpha delivered—the Alpha Cost Index (ACI). The ACI levels the playing field by penalizing products that charge active management fees but deliver the preponderance of their returns from beta exposures; thus serving as a useful ranking tool for due diligence.

Keywords: hedge funds, alpha, beta, fees, due diligence

JEL Classification: G10, G19

Suggested Citation

Sury, Sharath M. and Sury, Manda B, Analytic Due Diligence Using an Alpha Cost Index (April 16, 2006). Available at SSRN: https://ssrn.com/abstract=1482904

Sharath M. Sury (Contact Author)

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

HOME PAGE: http://phonebook.scu.edu/index.cfm?v=pid&i=1894

University of California ( email )

1156 High St
Santa Cruz, CA 95064
United States

Manda B Sury

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

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