Paying for Alpha while getting Beta ??
How do I know if a certain fund is delivering Beta while they are getting payed for Alpha (I am talking about L/S HFs) ? Is the simple fact that the fund's performance is correlated with the S&P (without overperforming it) means that the fund is just delivering Beta ?
Someone on this forum once said that there are funds that deliver Beta hidden well with a bit of Alpha or something in that sense. What does it exactly mean ?
Thank you !!
Correlation with the market is just market beta from the CAPM. Other than market beta, you must control for alternative beta - these are exposures to risk factors. These are the factor tilts of the PM - value, size, momentum etc. The residual return after controlling for these, is alpha.
Think about it - you shouldn't be paying alpha fees just to get returns from factor tilts. You as an LP can get that yourself by investing in factor index funds.
Whether this granular dissection of returns is 'fair' to the PM, is a separate debate. My personal, secular view is certainly that performance attribution is subjected to a lot of 'moving the goalposts' by academics and proponents of passive investing - meaning that you can always argue that a PM's returns was subjected to a hidden factor not yet observed. This is why the active/ passive debate will never be resolved, not that it's a bad thing tho. This is one response to your 2nd question - I'm saying that we can never be sure that a set of ex post returns does not encapsulate beta that hasn't yet been identified.
Most funds will never release enough info about their models for investors to know how much is alpha and how much is beta. Even if they did, most investors aren't mathematical enough to be able to verify those calculations, and even if they could, they wouldn't agree with the fund's analysis anyway because very small changes in assumptions will yield large differences in the factor model.
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