INVESTORS love to complain about hedge funds, which have delivered measly returns for the past several years and are notorious for their high fees. Yet so far, most have stuck with them. One reason is that the hedge funds’ mission—to provide returns uncorrelated with overall market performance—has been hard to replicate. But a fast-growing hedge-fund-like product, known as the “alternative beta” fund, allows investors much cheaper access to a similar style of investment.
“Alt-beta”, as it is usually called, is a bit of a misnomer. The word “beta” is typically used to mean broad market returns, which can be bought into through index-tracking funds. “Alpha” is the term used to describe the premium added by a skilled fund manager. The idea driving both “alt-beta” funds and longer-established “smart-beta” ones, is that, just as “beta” can be distinguished from “alpha”, so returns can be ascribed to identifiable, predictable factors. One example is the “value” effect: ie, that undervalued companies tend to outperform the market.
Smart-beta and alt-beta funds are close cousins, but differ in their...Continue reading
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