Elusive alpha, corrosive costs
As public and private markets become more efficient, alpha will be even harder to come by. That puts the spotlight on cost for active investors
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IN 1688, Joseph de la Vega wrote: “Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint stones, then morning dew, then tears.”
He was writing about the trading of shares on the Amsterdam Stock Exchange of his day. He could have been writing about modern-day alpha – that extra portion of return investors clamour for.
Academics can’t define it rigorously for lack of an agreed-upon market (asset-pricing) model. Empirically, and owing to statistical noise, it can be difficult to pin down, even when we use the returns-generating process of our choosing. Yet, many investors seem to think they can spot this element of return in advance. So, large numbers of them eagerly pursue alpha.
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