The chart below demonstrates the importance of Alpha in identifying future winners within the large universe of investment funds.
Alpha is the excess return of a fund relative to the return of a suitable market index on a risk-adjusted basis.
Hedge funds showing the highest Alpha ratios over a 3 year period outperformed the average of their peers in the following 18-month holding period by a margin of 4.01% annualized.
Funds selected by a simple principle of highest historical returns during the same 3 years, on the other hand, showed no outperformance against their benchmark.
Alpha can be considered a reliable criterion in determining a fund's management quality. Past outperformance due to the contribution of alpha can often point to a manager with a viable strategy and competitive skills. We rely on a fund's Alpha ratio as a measure of the soundness of its strategy and the professionalism of its management, features helping to ensure the fund's success in the future.
Comments are closed.