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Getting Alpha the Hard Way
I’ve always enjoyed perusing the Dealbreaker website for their witty and often spot-on observations of our business. But they really hit the nail on the head with a recent article by Matt Levine on the difficulty of generating excess returns in mutual funds.
The column begins with a look at a few academic studies on the subject. The first one compares the Morningstar mutual fund price database with the one compiled by the Center for Research in Security Prices, or CRSP (pronounced “crisp”) version, and found some intriguing and surprisingly large differences. It then introduces a concept called dollar value added, which is the gross return in excess of a benchmark (in this case a Vanguard index fund) multiplied by the assets under management.
Not to ruin the ending, but suffice to say that gaining an edge by owning actively managed mutual funds is extremely difficult. I covered this topic in some detail in "Searching for Alpha." This article offers a succinct read for an subject important to all investors.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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