Alternative beta better alternative than beta: University of Chicago's Moskowitz

Alternative beta better alternative than beta: University of Chicago's Moskowitz
Time to stop roaming the world in search of alpha, says professor of finance; market beta the worst of both worlds
MAY 14, 2012
When it comes to alternative investing, investors should forget about trying to find alpha and instead focus on alternative beta, according to Tobias Moskowitz, professor of finance at the University of Chicago. Speaking this morning in Washington, D.C., at the annual gathering of the Investment Management Consultants Association, Mr. Moskowitz said most hedge funds are providing very little alpha, or investment performance after adjusting for market risk. As for market beta, the professor believes that investors are generally getting the worst of both worlds. He explained that most hedge fund performance includes less beta when the market is rising and more beta when the market is falling. "In every single hedge fund category, the up beta is lower and the down beta is greater, and that's not what we want," he said. "There seems to be an obsession over finding alpha, what we don't want is beta products at alpha fees, and that's what we're getting currently at a lot of hedge funds." Mr. Moskowitz, who refused to mention specific names of hedge funds or alternative products, emphasized alternative beta because he said "traditional hedge funds do a lot of things that we don't want." He detailed three main components of hedge funds as being unique alpha, market beta and alternative beta. "Unique alpha is extremely hard to find, because we know that past performance does not indicate future performance," he said. "But what we should be doing is going after the low-hanging fruit by looking at the right betas." (/images/newsletters src="/wp-content/uploads2012/05/twitter-bullet.png" Follow Jeff Benjamin.)

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