Alpha: Difference between revisions

[[Alpha]], ''[[α]]'', 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]].  

Hence why it’s so popular in enhanced acronyms, tending as they do to be a means of hawking a new products, which one likes to imply will be better than everything else out there. [[Alpha]] is thus a catch-all {{tag|buzzword}} which more or less stands for “really cool”. And when have you ever known a salesman not to think his product is really cool? Also, it’s a vowel, and you need lots of vowels to make good acronyms.  

All this talk of [[Greeks]] brings to mind the critical distinction between [[alpha]], [[beta]] and [[vega]]. Strictly speaking, the measure of [[alpha]] excludes the amplifying effects of [[leverage]] (borrowing to invest in the strategy, magnifying profits and losses of a dollar invested). [[Leverage]] increases the volatility of portfolio returns. But volatility is measured by [[vega]], not [[alpha]]. While fund managers, particularly rubbish ones, are keen on conflating these two, they are, in fact, very different.