August 18, 2006
Why Beta Aims To Be Alpha
What are these terms doing in hedge funds? If you are new to the world of hedge funds, here are a few more terms you need to be introduced to. Firstly, let’s take a look at the beta because that’s what ordinary investors usually make do with. Beta means basic market returns as embodied by the Standard & Poor's 500 composite index of stocks. So what’s alpha. Well, there’s no hard and fast definition but they represent the outsized returns that come from more exotic investments. These usually come from tempting emerging markets in China and India, say, or commodities.
Now, there’s a new alpha in town – the portable alpha. This is the term investment managers have given to the notion that by moving out of the S&P 500 universe, they can match the performance of George Soros. And why is there such a rush to move to the alpha playground? One reason could be the wildly outsize reward for alpha performance. For the top 26 hedge fund managers, the average pay last year was a whopping $363 million!
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