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

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Weigand, Robert A.
Gorman, Larry R.
Washburn University. School of Business
Kaw Valley Bank
Issue Date
February 2008
Alternative Title
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.