Example of pure alpha

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cfa_mba

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Preparing for an interview ... with a firm that specilizes in "portable alpha".

I understand the theory behind risk capital allocation between beta and alpha, then achieving the beta with derivatives and then adding pure alphas on top of the portfolios.

However, I am not sure what exactly will qualify as a pure alpha that is uncorrelated with betas.

Could someone please provide explain with examples what are the "pure alpha" generators.

Tx
 
Any fund that generates pure alpha will be uncorrelated with equity markets. Think of market neutral type of products...

An investor is paying for pure excess return and not the market.
 
Hey CFA_MBA

It sounds like a firm I interviewed with last week...any chance you're in Toronto?
 
Oh yeah? What firm(s) in Toronto are we talking about? Any color on CPP? OTPP?
 
Steve12,

This firm is not in Canada, it is US based.
 
AbsintheMinded,

Agreed, but what are some market neutral examples?

I am looking for more practical examples than theory.
 
An example could be a market-neutral, equity long-short hedge fund that equalizes the beta between it's long and short positions. It could also be an investment in a traditional long-only equity manager combined with a short futures/swap position in it's benchmark.

Just keep in mind, however, that the term "alpha" within the context of portable alpha is often misused. For example, someone will "port" the returns of a high-yield bond fund onto a equity beta overlay and describe it as portable alpha, though they're in reality getting equity beta, high-yield "beta" and high yield alpha.
 
Most strategies that generate arbitrage profit, aka convertible bond arbitrage, m&a arbitrage, are attempting to gain profit purely from alpha. With equal long and short positions you should not be able to make a profit, if you do, then the profit is generated from pricing inefficiencies which is the alpha.



Edited 1 time(s). Last edit at Friday, June 16, 2006 at 06:01PM by masamunexs.
 
Toronto,

No neither one. Sort of boutique firm but manages $6 billion+. Have to admit I was hesitant at first since I currently work for one of the Big 4 banks but when I got there I was impressed. Seems like some of these lesser known firms have the mad loot.
 
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