Where Do Alphas Come from? : A New Measure of the Value of Active Investment Management

With the growing popularity of hedge funds and other absolute-return investment strategies, there is a widening gap between the performance metrics of traditional investment management and alternatives. While alpha, beta, volatility, tracking error, the Sharpe ratio, and the information ration have become the standard tools for gauging the value-added of long-only portfolio managers, they have not had as much impact among investors of absolute-return strategies. Part of this gap is no doubt cultural in origin; the growth of the mutual-fund industry was accelerated by the broad acceptance of portfolio theory and the benefits of diversification. This, in turn, led to the push for indexation and benchmark-based performance attribution, from which many of the current performance measures emerged