completeness fund and misfit risk

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linping85

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I want to know the difference between completeness fund and alpha/beta separation? because in completeness fund, also have passive investment+active portfolio.
to me, it is also alpha+beta. how can it reduce misfit risk? can it reduce systematic risk?
 
Completeness fund is managed passively/semi actively
Idea of pursing completeness fund is to resemble the risk characteristics of the benchmark with some room for active return. In a way it fixes the active return & minimizes the active risk to make it comparable with benchmark. By reducing active risk, it reduces the misfit risk (which is required to have a potential to earn active return).
Alpha/beta separation : You capture alpha & also gain systematic exposure to other market. Since large are relatively efficient markets, it difficult to generate alphas here. So you like to have systemetic exposure of lets say small cap market (beta). Advantages: Clealry delineates the risk of alpha & beta.
Also if you gain systematic exposure to some markets lets say Japan this gives the rise to portability of alpha.
??
 
good,
how is portable of alpha be done? if I wan to invest Japan, is buying japan future a portable alpha?
 
Alpha is said to be portabile coz it could be linked to other markets to gain beta…in the above ex buy/sell japan future would give access to gain beta from japanese market. One ques in EOC in book exemplifies that the current manager is good in long/short strategies but the client who feels that japanese market is looking lucrative & looking to hire another manager. Current PM also can meet client’s wishes by pursuing Alpha-beta approach (offcourse also with some modification in the investment mandate)
 
for Misfit
Misfit risk = Manager’s normal benchmark (reflective of his own style) - Investor benchmark (sponsor may using broad benchmark)
So some level of misfit risk is advisable coz if manager is let to pursue his own style - it would be more flexible in order to generate active return. In completeness fund, since we look to decrease risk, some part of active return is also sacrificed
 
Yes, one of the disadvantages of completeness fund approach is that it reduces misfit risk and thereby reucing actiev return
 
rahuls wrote:
Completeness fund is managed passively/semi actively
Idea of pursing completeness fund is to resemble the risk characteristics of the benchmark with some room for active return. In a way it fixes the active return & minimizes the active risk to make it comparable with benchmark. By reducing active risk, it reduces the misfit risk (which is required to have a potential to earn active return).
Alpha/beta separation : You capture alpha & also gain systematic exposure to other market. Since large are relatively efficient markets, it difficult to generate alphas here. So you like to have systemetic exposure of lets say small cap market (beta). Advantages: Clealry delineates the risk of alpha & beta.
Also if you gain systematic exposure to some markets lets say Japan this gives the rise to portability of alpha.
??

so wouldnt you want Beta from the large cap market and get alpha from the small cap market since its more inefficient?
Click to expand...
 
Ok this thread is reminding me of someting I ran into a while back…. it had to do with liquidity, and MAYBE market cap (large cap vs small cap)…
It was an alpha/beta separation and said that the alpha portion would be better from a highly liquid and efficient market because the alpha portfolio needs liquidity to trade in and out of short positions that it could otherwise get trapped into when it came time to cover, or at least something to that effect. This is counter-intuitive because to me, you would take market exposure of an efficient large cap index since it’s probably hard to earn alpha there anyhow, and try to get your alpha from an inefficient market where there are more opportunities (but it’s probably less liquid)
Anybody got insight here?
 
imo, i think “inefficient” market here does not mean less liquid. It means infomation is not fully priced in the stock value
 
I wish I could remember the exact question, I think it was maybe an EoC…. really threw me off and I’m still unsure
 
I think Beta can be taken by exposing to markets or sectors where it’s hard to earn a alpha. For example, investing in larger cap index(very liquid) and in foreign markets(may not be as liquid).
Alpha is usually captured by using market-neutral strategy, which is an active stratgey. It works in a liquid but inefficient market.
I have a question:
What is the relationship between Market-neutral strategy and Efficent Market Hypothesis?
[Does it dispute semi-strong form efficieny?]
 
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