Risk and Return » benchmarks

A “common sense approach for those who believe in active management”

Lance — Mon, 05 May 2008 18:49:37 +0000

That is All About Alpha’s assessment of 130/30 funds (definition here.) Which seems about right to us.

Few active managers, even if they actually outperform their benchmarks, can overcome the expenses associated with doing so. The reason is not necessarily that they cannot do a good enough job of picking investments that can outperform, but that constrained to only going long they can’t make a big enough bet on what they like, or don’t like, to move the needle sufficiently! Here is a nice examination of this issue.

The Alpha male has several nice posts up on this in addition to the ones above. On appropriate benchmarks:

After launching 130/30 index, S&P says best yardstick is actually a long-only index and Survey of hedge fund professionals: 130/30 “minor discussion within larger context”

The evolution of these vehicles:

The new face of 130/30? and Reality Check: “130/30? and “quant” not synonymous

For a discussion of the actual alpha that theoretically might be received by investors read this post on an interesting study:

130/30 in the 1930s

Most importantly, for those unfortunate enough to have been exposed to Chuck Jaffe’s execrable column on 130/30 strategies (or their brethren) I recommend Media turns hostile: 130/30 now “dubious” “overblown” “faddish” “hype”. The Alpha Male is more generous with Jaffe than I would be, but that is probably a good thing.

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Technorati Tags 130/30, alpha, alternative strategy, investing

Index Alpha

Lance — Sun, 03 Feb 2008 15:09:18 +0000

Index investing is often described as “passive” or “beta” investing. However, one thing that is often looked past is exactly how active the construction process of indexes is in practice. Steve Galbraith used to say when I, and he, was with Morgan Stanley (before he went to manage money with Maverick Capital) that buying S&P500 meant investing in an actively managed, overvalued, large cap growth fund. This was especially true in the late 1990’s as more and more technology was added to the index.

All About Alpha examines the results of a paper in the January 2008 edition of the Journal, European Financial Management which shows Steve had it right:

In other words, these “selection and exclusion rules” constitute active management (much to the delight, we’re guessing of Fundamental Indexation proponents). In fact, the authors say these rules have an effect remarkable similar to recognized trading strategies “such as momentum, autocorrelation and the limitation of tail risks.”

Result? Better performance during bull markets, worse in bear markets. Color us unsurprised. Indexes have both alpha and beta characteristics.

A core takeaway, risk and return characteristics of indexes have to be assessed. There is no true passive, and in building your asset allocation the construction of the index, whether invested in through mutual funds and ETF’s, or used as a benchmark, carries tremendous weight.

Read the whole thing.

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Technorati Tags alpha, benchmarks, beta, fundamental indexation, indexes, S&P500, Steve Galbraith