Buffett's Alpha

34 Pages Posted: 30 Jun 2018 Last revised: 10 Jan 2019

See all articles by Andrea Frazzini

Andrea Frazzini

AQR Capital Management, LLC

David Kabiller

AQR Capital Management, LLC

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 9, 2019

Abstract

Berkshire Hathaway has realized a Sharpe ratio of 0.79 with significant alpha to traditional risk factors. However, the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.7-to-1 on average. Therefore, Buffett’s returns appear to be neither luck nor magic, but, rather, reward for leveraging cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management.

Keywords: investments, market efficiency, leverage, quality, value, betting against beta

JEL Classification: G11, G12, G14, G22, G23

Suggested Citation

Frazzini, Andrea and Kabiller, David and Pedersen, Lasse Heje, Buffett's Alpha (January 9, 2019). Financial Analysts Journal, 2018, 74 (4): 35-55. Available at SSRN: https://ssrn.com/abstract=3197185 or http://dx.doi.org/10.2139/ssrn.3197185

Andrea Frazzini

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3894 (Phone)
203-742-3394 (Fax)

HOME PAGE: http://www.econ.yale.edu/~af227/

David Kabiller

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Lasse Heje Pedersen (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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