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| Risk & Reward: Strategy: Alpha-Betting |
Alpha Opportunities
John Ferry
04/01/2006
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A successful portable
alpha strategy requires alpha-generating opportunities and managers with the
skill to harvest them. The table below shows the historical median alpha over a
10-year period (the excess return over beta times the benchmark) for U.S. fund
managers in a number of strategies, as well as their risk.
The table demonstrates the wide variation of alpha
opportunities in different markets. The average active small-cap manager, for
example, produced more than three times the amount of alpha as the comparable
large-cap manager, at 4.8 percent alpha and 1.3 percent alpha respectively, over
the 10-year period. (However, the small-cap manager carried significantly more
risk than his large-cap counterpart.) This raises another issue: "The reality
is, alpha is tough to find," says Ed Kung, of Babson Capital Management. "To
identify alpha (opportunities) ahead of other people and consistently access
them across time is very challenging."
MEDIAN MANAGER ALPHA AND ACTIVE RISK
10 years ending December 2004 | Asset
Class | Alpha
(percent) | Active Risk
(standard
deviation) | | Large-cap core | 1.3 | 4.8 | Large-cap growth | 3.2 | 7.8 | Large-cap value | 0.6 | 5.5 | Small-cap core | 4.8 | 8.3 | Small-cap growth | 6.1 | 11.1 | Small-cap value | 2.4 | 7.1 | Core fixed income | 0.3 | 0.9 | High yield | 3.2 | 3.7 | Emerging market | 3.6 | 6.9 | Non-US equity | 2.7 | 6.4 | Non-US fixed income | 1.2 | 2.2 | Real estate | 5 | 3.3 |
 Back to Main Article: Alpha-Betting
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