Isolating Alpha
Identifying, isolating and delivering alpha to investors in a convenient delivery vehicle creates a variety of interesting asset allocation opportunities. Traditional portfolios that are actively managed provide return characteristics that contain both beta and alpha. By separating out the two an investor can create greater flexibility in their asset allocation decisions. Clean beta is both easy to understand and inexpensive. Blurring it with active decisions creates challenges in understanding and managing the risks associated with that beta. Additionally because many actively managed mutual funds blur together both beta and alpha they get away with charging investors much more for that beta then what they would pay if invested in a passively managed product.
