The ABCs of Alpha, Beta and Changing Markets
Executive Summary
Over the past 40 years, the market has changed substantially, becoming more disaggregated and more complex. Rather than being intimidated by these complexities, we believe investors should take advantage of them to systematically gain better insights into their portfolio allocations, investments, and managers:
- The desire for alpha remains consistent. But accurately assessing both the sources of and impediments to alpha in your portfolio can be challenging. Are managers delivering what they promised? Is the investment adding or detracting from the overall portfolio? What other options are there? Is the current asset allocation strategy working?
- Without a systematic lens, investors may myopically focus on alpha and overlook additional elements that impact performance, and therefore, may not have a complete understanding of the earning potential of their portfolio. This is where a quant could be helpful. Because of their ability to process large amounts of data, a good quantitative manager has the ability to assess these performance drivers and optimize portfolios in a way that not only aims to capture excess returns, but also accounts for performance detractors, expected and unexpected.
- Knowledge is power. In current markets, the options available to investors are endless. By understanding the components that impact portfolio outcomes and using some (relatively) simple math, investors can evaluate impact and opportunity at the manager level, at the asset-class level, and for the portfolio as a whole, thus allowing them to take control of their investments.