Alpha versus Beta

 

In this case, Alpha is not a planet or a constellation. In the world of investments, Alpha is understood as the fund’s excess profitability according to a reference index. For example an Alpha of 3% means that a fund gets a 3% additional return. Usually, Alpha and Beta are measured at the same time. In the preceding article we got lost and ended up only talking about “Smart Beta”. However, Alpha actually does exist.

A guide to finding Alpha

 

Meb Faber’s book “Invest with the House” is devoted to some extent to this purpose. In this book, the author first identifies 20 successful Hedge Funds. Then, he shows how these funds have achieved almost a 10% Alpha according to the S&P 500 in the last 14 years. This means that during this period of time, while the index registered a 4.31% return per year these funds generated an excellent 14.18% return. This is the real Alpha! The book not only identifies these successful funds but it provides us with a guide to follow them. The book states that it is possible to clone the funds’ success by selecting the main positions and despite the delay that managers suffer when they have to report their positions. There are several websites that keep track of these funds and that are at your disposal. Any investor can invest like a great and well-known investor; not only the famous Warren Buffett, but activists like Ackmann.

Investment strategies, Inbestme’s Scope:

 

In addition, the author suggests following a particular investment strategy: in special situations, by making a market hedge an investor could end up achieving the pure Alpha.

However, to follow the best of the best one needs discipline, patience and time to track their movements regularly.

A valid and simple alternative would be to find ETFs that follow this same strategy. There are several ETFs that have this very objective. One of these ETFs is known precisely as ALFA and the latest version of it is ALFI because it has an international approach. Another ETF to take into consideration is GURU.

Therefore, hedge funds are a solution if the path is hard to find to Alpha using active mutual funds. The problem we bump into while using hedge funds is that to access these funds we need to have a Rolls Royce at the door and we have to be willing to pay high fees.Therefore, if the path to the Alfa is difficult to find with funds invested in assets, a solution are hedge funds. A big problem with hedge funds is that access to them is to have a Rolls Royce at the door and be willing to pay high fees (usually a fixed 2.5% plus 20% of the returns, 5% total).

 

The best solutions are at your disposal and with zero cost: keep track of the best investors record’s or contract ETFs with built-in Alpha. An easier solution is to follow the positions of these same ETFs which are declared in a transparent and consistent manner.

Alpha then, is neither so far away nor so unattainable. It’s just a matter of following these instructions. You have the option to purchase these ETFs or follow their positions at:

Alphaclone

Global X

Alternatively, you can devote more time and pick those hedge funds that best suit you and clone them. To help, you can check some handy websites:

WhaleWisdom

Insider Monkey

There are many more. If you want more information please send an email or leave us a comment below.

If you don’t have time to do an exhaustive search you can always choose to invest with us and we are just a couple clicks away. Our customized portfolios count on complementary investment strategies and even some are pointed to follow the best of the best.

However, one can find simpler and equally efficient investment strategies at a lower cost. Our diversified portfolios are an excellent example.

Meanwhile, if you want to take a look at the positions that the hedge fund cloners share click here.

Note: All graphs and charts have been taken from the book mentioned in this article:

“Invest with the house: hacking the top hedge funds” Meb Faber.

 

We highly recommend reading this book to anyone who wants to know more about this topic.

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