Measuring Alpha Based Performance: Implications for Alpha Focused, Structured Products
15 Pages Posted: 14 Oct 2009
Date Written: October 14, 2009
Abstract
Portable Alpha, an alpha-focused absolute return product with tremendous potential, has met with somewhat muted demand. Much of the confusion arises from a lack of clear consensus regarding a strict definition of alpha. Inquiries by potential investors are too often met with off the cuff, vague, and inconsistent explanations of the product. One remedy is to improve the clarity of exactly what alpha is, and when it is worth paying for. These ideas should be broadly disseminated. Relative return products such as active portfolio extensions (130/30 funds) pose an additional challenge for Portable Alpha, as they serve as substitute goods. Direct comparisons between Portable Alpha and active extension products have traditionally been difficult to obtain, in large part due to asymmetric performance methodologies in which the information ratio is only computed for active extension products. Reconciling this and other performance measurement issues, and moving to a common assessment methodology in which both absolute and relative return products are assessed via an investor focused information ratio would do much to improve investor demand for both products. The result will likely be a significant increase in collective demand for all professionally managed alpha-focused products.
Keywords: Portable Alpha, 130/30, Information Ratio, Fama-French, Active Investing, Absolute Return, Relative Return, Mis-specification
JEL Classification: G11, G12
Suggested Citation: Suggested Citation
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