Measuring Alpha-Based Performance: Implications for Alpha-Focused Structured Products
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Author
Weigand, Robert A.
Gorman, Larry R.
Publisher
Washburn University. School of Business
Sponsor
Kaw Valley Bank
Issue Date
February 2008
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Abstract
We propose that the muted demand for investment innovations such as Portable Alpha arise, at least in part, from a lack of clarity and transparency regarding the way alpha is defined and measured. We show that the profession has been debating the closely-related issue of alpha/beta separation as far back as the 1970s, and argue that lack of closure regarding this debate is a natural and expected feature of innovation in money management products. we provide an example of how to measure alpha bias in the context of benchmarking an actively-managed equity portfolio, and find a maximum potential bias from 1997-2006 of +/-5% per year.