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[[Alpha]] is a {{tag|buzzword}} beloved of unimaginative derivative salespeople and second-rate {{tag|hedge fund}} managers and hence was much abused in the run up to the great financial crash of 2008. Like many financial buzzwords, it is derived from a technical term in portfolio management theory which does actually mean something, though through long misuse in the hands of such charlatans the original, literal meaning has fallen almost completely out of use. | [[Alpha]] is one of the {{tag|Greeks}} - the ''first'' of the {{tag|Greeks}} - a {{tag|buzzword}} beloved of unimaginative derivative salespeople and second-rate {{tag|hedge fund}} managers and hence was much abused in the run up to the great financial crash of 2008. Like many financial buzzwords, it is derived from a technical term in portfolio management theory which does actually mean something, though through long misuse in the hands of such charlatans the original, literal meaning has fallen almost completely out of use. | ||
In a technical sense, [[alpha]] is a measure of market outperformance: it gauges the variance of a portfolio's performance over the market average, or "[[beta]]". An investment manager's [[alpha]], therefore, is the added value that manager brings you that you would miss out on if you just invested in the [[benchmark]]. | In a technical sense, [[alpha]] is a measure of market outperformance: it gauges the variance of a portfolio's performance over the market average, or "[[beta]]". An investment manager's [[alpha]], therefore, is the added value that manager brings you that you would miss out on if you just invested in the [[benchmark]]. | ||
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"[[Alpha]]" was a far more credible label when {{tag|hedge fund}}s were a small segment of the market comprising the crème de la crème of the city's trading talent - the Soroses and GLGs of the world, who really could outperform the rest of the market. If someone is incautious enough to claim they're generating leveraged alpha, they're either so stupid as to admit they're really just gearing the whoopsie out of your investment (if it goes wrong, guess who loses?), or they think you're so stupid you won't understand that. And quite possibly both. | "[[Alpha]]" was a far more credible label when {{tag|hedge fund}}s were a small segment of the market comprising the crème de la crème of the city's trading talent - the Soroses and GLGs of the world, who really could outperform the rest of the market. If someone is incautious enough to claim they're generating leveraged alpha, they're either so stupid as to admit they're really just gearing the whoopsie out of your investment (if it goes wrong, guess who loses?), or they think you're so stupid you won't understand that. And quite possibly both. | ||
Beware of {{c|Greeks}} bearing [[leverage]]. | |||