Investing Myths: Alpha and Beta

[spider]

Interesting stuff, Naj, I might tried to read some of this closer later on. I sort of agree with what you are saying in theory, but I'm not sure if it applies to 90% of the population (and hence the popularity of index funds). I'll just use a couple of examples.

Take Jon Corzine. I assume he doesn't manage his own money now (at least at the level of details) now that his is governor (and for the moment, in the hospital). But I think what you are saying would certainly apply to him. He knows who to give his money to (who has talent and can be trusted) and he has enough money that he should get a good deal -- he won't pay $1 for $1 of alpha, he'll pay 30 cents.

But take somebody with out Corzine's knowledge of Wall Street and with a mere 200k of assets. Can they really get any sort of alpha? Problem #1 for them is going to be how they figure out who can make the alpha in the future given they don't know much about the market. Problem #2 is what they are going to pay for that alpha. Assuming they aren't going to give more than 25% of their money to a hedge fund, what kind of hedge fund is really going to be interested in 50k? I'm mean sure, someone will take it but after 2 and 20, what is left?

And sure some of this you can do yourself, but you have to be smart, knowledgeable, and spend the time. Yeah, you can go long this and short that on the basis of high beta/low beta, but how do you know which is which?

I mean, take what you are saying about the corporate spreads. I think it's fairly accepted that spreads aren't big enough now but maybe in two years the opposite will be true. Sure, that's exploitable in theory in either direction, but not in practice by your average investor.

[NajdorfDefense]

[ QUOTE ]
Interesting stuff, Naj, I might tried to read some of this closer later on. I sort of agree with what you are saying in theory, but I'm not sure if it applies to ... Sure, that's exploitable in theory in either direction, but not in practice by your average investor.

[/ QUOTE ]

It would equally be a myth to say 'Every investor can capture alpha' or 'all managers generate positive alpha,' like a poker game, Alpha is zero-sum, not everyone can create/retail positive alpha, I totally agree.

However, plenty of public managers/investors generate alpha, and have been doing so for 2-5 decades.

[Thremp]

hawk,

Okay I think I got it more now. The 5/7 are the collars of it and you're sliding in between makes more sense.