Alpha Beta Separation Approach

How does this work if: 1. Shorting is not allowed: 2. Shorting is allowed: This one confuses the heck out of me.

  1. Shorting is not allowed: Never thought about this; could this simply be to long low beta stocks from the inefficient market for picking up alpha? Then pick up the systematic risk from the efficient market. 2. Shorting is allowed: Do a long / short on the inefficient market (usually small cap) to pick up double alpha. Then pick up the systematic risk from the efficient market.

pimp Wrote: ------------------------------------------------------- > How does this work if: > > 1. Shorting is not allowed: > Manager goes Long his local market for beta exposure. He then goes long in say a foreign market while sell the foreign market futures. This leaves a net zero positions in the foreign market with only the active exposure of the for manager. > > > 2. Shorting is allowed: Go long something for beta. Separate L/S portfolio for alpha exposure. Alpha is portable in both cases because on set (beta) is not tied to the other (alpha). That is my understanding. > > > This one confuses the heck out of me.

q - is selling the future’s considered short?

lxwqh Wrote: ------------------------------------------------------- > q - is selling the future’s considered short? I don’t think so. Hey pimp, can you verify my answer?

I’m not sure - that’s the source of my confusion.

Isn’t alpha beta seperation the same as market neutral except the alpha portion doesn’t have to be neutral?

How is alpha beta separation approach different from core satellite approach. They sound awfully similar to me with exception of satellite may not be using short positions while AB approach does. Any clarifications would be appreciated.

I don’t have my books to verify this, but this is my understanding of Alpha Beta Separation, Market Neutral Strategies, and Core-Satellite Strategies Alpha Beta Separation - A fund manager goes Long index A, short index B, long a specific security in index B. This results in the systematic risk of index A and the unsystematic risk of the security within index B Market Neutral Strategy i.e. pair trade - Long a security in index A, short a security in index A. The systematic risk offsets and you are left with the potential to earn two Alphas Equitized Market Neutral Strategy - Start in pair trade and add an ETF or derivative that tracks index B. Now you get the systematic risk of index B with potentially two Alphas. Core Satellite - A Fund Sponsor (not portfolio manager) holds a core of funds designed to track the index and hires specific PMs to achieve Alpha. If any of that is inaccurate I would appreciate if someone could point it out.

Bankin’ all your definitions look right to me. And your clarification of Fund Sponsor for C/S vs. Fund Manager for A/B Separation is a good point as well. I guess that point as well as long/short for A/B seperation make sufficient distinction between the two. Thx

With a market neutral strategy (not equitized), you invest the proceeds of the short sale at the Rf rate, correct? And so the appropriate benchmark for the strategy is the Rf rate?

ilvino Wrote: ------------------------------------------------------- > With a market neutral strategy (not equitized), > you invest the proceeds of the short sale at the > Rf rate, correct? And so the appropriate > benchmark for the strategy is the Rf rate? i believe the Rf rate is the appropriate benchmark for a market-neutral strategy because u don’t have any market (systematic) risk. so would be wrong to compare your performance relative to the market benchmark.

cool - now if we equitize the market neutral strategy, we buy futures on some Index A in the amount equal to the proceeds of our short sales, and therefore should compare our performance relative to Index A, right?

Yes, that is my understanding ilvino.

ilvino Wrote: ------------------------------------------------------- > With a market neutral strategy (not equitized), > you invest the proceeds of the short sale at the > Rf rate, correct? And so the appropriate > benchmark for the strategy is the Rf rate? I agree with Magix explanation as to why the RFR is the benchmark. With that said, I think in a non-equitized pair trade it is assumed that the proceeds of the short sale are held in cash (read RFR). ilvino Wrote: ------------------------------------------------------- > cool - now if we equitize the market neutral > strategy, we buy futures on some Index A in the > amount equal to the proceeds of our short sales, > and therefore should compare our performance > relative to Index A, right? yes

Thanks for the clarification.

This has been well covered above but my $0.02 to clarify my thinking: Think of Alpha as security selection and beta as market volatility. You get “portable alpha” by negating beta (Beta =0). If I can short this means I go long & short securities with the same beta which leaves me with 2 alpha returns R1 + R2= Rport, but beta of 0 B1= 1 B2 = -1 so B1 +B2 = 0. If I can’t short I get 0 Beta by investing long in a number of uncorrelated assets. Bridgewater Associates does this with 15 different uncorrelated securities (commodities, currencies, bonds, stocks) from all over the world.

Hey Bankin, Not sure that the fund sponsor vs fund manager distinction holds up: For Alpha/Beta Separation: “Investor may choose to hire a Russell index fund manager and a manager that seeks to add 4% annual alpha…” Since this investor is hiring multiple managers, the investor could be a plan sponsor as well. But your description of Alpha Beta separation positions as: Long Index A, Short Index B, Long Security from Index B is consistent with the A/B Separation strategy in the reading (end of p. 239, V. 4). Good Luck Saturday Everyone!