Ok so alpha/beta seperation states that you would do this in markets that are highly efficient and difficult to generate alpha but it goes on to say that you can pick up beta with the S&P 500 index fund and the alpha in a less efficient market such as small cap markets. My question is why do they say it is good to use in an efficient market but then go on to suggest that you use it in a less efficient market? When they say it is good to be used in efficient markets are they referencing the index fund?
beta’s good in efficient marekts, you generate alpha in less efficient markets. so long futures in large cap, efficient markets and long short strategies in small cap, inefficient markets. For instance.
Ok yea that is what I figured but I do not know why they would state this strategy is suitable for markets that are highly efficient. And also they go on to say that in less efficient markets alpha may be difficult to generate due to low liquidity, transaction costs, establish short positions, etc… Anyhow I think I get the concept but explanation is not helpful.
CFAI states that it is hard to generate alpha in emerging markets or small markets. Advantages of a/b strategy is exposure to asset classes/styles outside the beta asset class
Really? Did I read that right? Emerging Markets should be full of inefficiencies, which are alpha opportunities. Or is the argument that all these inefficiencies exist because of liquidity constraints, so the alpha is there for a paper portfolio, but inaccessible in practice.
Thats what CFA says, they dont say if it is easier or harder to generate alpha then in efficient markets, they just state that it is hard to do it because of constraints
Also, It’s harder b/c its harder to Short securities in Emerging Mkts due to liquidity and other legal factors. So its hard to have a L/S strategy when shorts are constrained.