The death of alpha

THE entire purpose of asset management is to create alpha. Active asset management started some 70 years ago, and has grown significantly in that time. In the early days when information was difficult to obtain, achieving alpha was a much easier goal. Warren Buffett regularly posted annualised returns of over 30 per cent in his first two decades of investing. As recently as the 1990s, there were a few hedge fund managers who also posted annual returns of over 30 per cent after fees.

But we have a major problem: alpha is disappearing. And investors have noticed, flocking in droves away from actively managed funds and into exchange traded funds (ETFs).

Alpha is the excess return above the market's return, also known as beta. Beta can be easily achieved by simply buying an index via an ETF.