WHERE'S THE ALPHA?

At a recent cocktail party one evening an attractive, young couple off in the corner were apparently debating the market and interest rates.

At one point in the discussion, now at a boisterous level that attracted others in the room, the lady yelled at her companion: 

"Up your alpha!" To which her companion promptly replied: "Well, screw your beta!"

A few minutes later, hand in hand, the couple smilingly announced they were off  to another more hip gathering and ebulliently sauntered out.

Lemmings don't wear stripes or signs. But they should.

In the market these days there's much ado about what many mom and poppers either don't care to or can't grasp--alpha and beta.

Simply stated, alpha is any added value or return active management brings to one's investment table. Beta, on the other hand, is a measure of the risk arising from exposure to general market movements or asset classes, all things equal.

A few years back when hedge funds fell off their once envied shelf, it was hard to avoid all the negative press there were receiving. Recall  hedge funds originally  were the alternative kid in town, taking advantage of things, to use the Street vernacular, not correlated to what was available for many reasons to the mom and pop crowd.

And forget not that once upon a time the mom and pop crowd included, except for their economic clout, pension funds, university endowments, insurance companies and the like. The huge California pension fund, Calpers, should come to mind. It was one of the first to open its deep wallet and invest in hedgers.

The search for return, safe or otherwise, as we're seeing in this yield-starved, Fed-created scenario of low interest rates, has its own energy. Some might refer to the run-up in bond prices and the run-down in yields as a form of momentum investing. A kind of perverted go with the flow mentality MSM and other various talking-heads love to promote.

Hedge funds are noted for taking around 20% off the top of performance and high fees. Their meme, big alpha, supposedly justified the costs. It was a culture available to only a select fee. That is to say they invested in things not correlated for the most part to the general stock market and it's often prosaic movements.

The bad news these bad boys were experiencing then--dwindling assets, closures, toothless returns, to name a few--apparently now rest comfortably on the scrap heap of investor memories. At least that's what the numbers show.

As the stock market get larger, so too have those hedge funds as money once again is pouring in from investors of all stripes. Only this time there's a difference. 

It's the absence of their once ballyhooed negative correlation. According to what we read, not only are assets in these funds growing but the data also shows that they're more correlated than ever with the  stock market.

In short, back to alpha and beta, investors are paying up for the privilege of alpha but mostly likely will only receive beta, which they already most likely are getting other places. If as they say a rising tide raises all boats, then positive correlation can do the reverse.
t. man hatter