Investment management in one post.

Principles

• Alpha is the excess return that comes from taking advantage of some sort of mispricing or price dislocation. In other words, exploiting market inefficiencies.

• Beta (a.k.a. market and factor exposures, smart beta and alternative risk premia) is the risk premium you receive for bearing these various risks or exposures.

• Alpha and beta are separate concepts and should be assessed differently and remunerated differently.

• The challenge for alpha is that it is evanescent, so you need to be able to identify and exploit if before it inevitably goes away. It is also capacity constrained. You need an efficient way to access it.

• The challenge for beta is that you actually have to bear the risk. And further, the risk premium you are receiving varies through time and may even be negative. The choice and timing of your exposure to betas becomes important.

Implications

• If you can find genuine alpha, then allocate to it as it offers excess returns without increasing your existing portfolio risk.

• Most of your investment should be allocated to beta in a way that maximally diversifies across your beta exposures taking into account your existing portfolio.

• Make sure you are only paying management fees for beta and performance fees for alpha.

That's it!

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