difference between allocation alpha and truly active alpha
Allocation Alpha, You are a small cap manager, your fund’s return is 8%, you are comparing your fund return to S&P 500’s 5%, your Alpha is 3% True Active Alpha, You are a small cap manager, your fund retunr is 8%, you are comparing your fund return to a your true benchmark, a small cap index’s 7%, your true active Alpha is 1%.
Allocation Alpha is the alpha that could be achieved by slightly tilting the allocation of the portfolio towards emerging market, and other asset classes. True active alpha is the alpha that is achieved by actively manage the portfolio.
true active alpha should be measured using style based analysis… if a “small cap fund” is slightly larger and more valuey than say the S&P 600… it’s benchmark should be a composite of say 80% 600, 10% 600 growth, 10% 400 (with the weights being computed using multiple regression. the alpha would then be based soley on stock selection instead of style bets.
true alpha is calculated based on normal (custom) benchmark.
yeah… but most fund managers… style doesn’t vary too much… if they tend to be small value they shouldn’t get any credit when small value stocks out perform large growth stocks… they should only get credit for picking better stocks compared to their style benchmark.