That's No Ordinary Rabbit Beta
I get a lot of stuff in my email that I never asked for but just get anyway.One that I get had an interesting title, something about not paying Alpha fees (no not the sorority) for beta results.
This got me to thinking a little bit. I have read all sorts of things over the years, you probably have too, and one theory is that there is only so much alpha to go around. This may have come from MIT but either way alpha versus beta is useful to learn about in the context of trying to be a better portfolio manager (applies to do-it-yourselfers too)?
An often inferred or assumed point of information is that do-it-yourselfers cannot reliably add alpha. I don't know why people think this but I have seen that sentiment from professional research and from past comments to the blog. I don't think alpha is finite and I think anyone, with enough time, has a chance to add alpha.
Ooh, wait, alpha defined as excess return beyond the market and beta defined as the market itself, the volatility of the market.
If someone really cannot add alpha then the focus of their attention needs to be when to increase and decrease beta. The idea would be increasing exposure to beta, to the market, when it was going higher and decreasing when it went lower. This is far from an original concept but I don't think I have written about it in this context.
When the market is going up increase exposure, increase the octane and vice versa when it is going down. In a perfect world if the double long S&P 500 fund was intended to capture twice the daily move of the S&P 500 over time periods longer than one day you could just buy that (quick note, the double long S&P 500 ETF lagged SPY in calendar 2007).
This will be intellectually appealing to some folks but I think it is much harder to do. Markets turn quickly and it would be easy to get caught wrong footed with more octane in your account.
Most of the stuff I write about, and implement, explores how to put the odds in your favor based on how the market tends to work (examples; consumer discretionary does poorly late cycle, utilities do poorly in a rising rate environment).
I'm not big on alpha as a finite resource or it's all about the beta but the topic, at a minimum, is useful in the learning process.
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