Measuring Alpha-Based Performance: Implications for Alpha-Focused Structured Products

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.