What’s so special about these ? Isn’t it just usually 2 strategies that work independently . eg. Index and some other alpha derived elsewhere ? Am I missing something here ?
all I can think of would be alpha beta separation.
Yes but isn’t that just 2 separate strategies ?
Forgot to add. What I mean is one offsetting the risk of another ? Beta exposure in a highly efficient market (indexing) can be complemented by an alpha strategy in a less efficient market such as small caps/emerging mkt. Why aren’t these 2 just considered separate items?
Alpha beta separation would be like going long a small cap stock active manager to generate alpha, while shorting the small cap index futures (remove small cap beta) and going long the S&P 500 index futures (adding large cap beta). So you are getting alpha from the small cap active management, and beta from US large cap stocks.
So hedging the small cap exposure and gaining large cap systematic risk, Couldn’t that be done independently ? Sorry to labour this one .
ilvino Wrote: ------------------------------------------------------- > Alpha beta separation would be like going long a > small cap stock active manager to generate alpha, > while shorting the small cap index futures (remove > small cap beta) and going long the S&P 500 index > futures (adding large cap beta). So you are > getting alpha from the small cap active > management, and beta from US large cap stocks. correct. and portable alpha implies that if you decide you can get your beta exposure from a different index (instead of the S&P 500). that would not affect the manner in which you are generating alpha (is portable) can someone verify if i got this right?
Ilvino, I think that would be the case if you were an institution prohibited from utilizing a long short manager. Typical alpha beta seperation; large caps informationally efficient so we will pick up beta there, than utilize a long short manager for alpha. One follow up question though; when market neutral do you need to use a pair trade (long underpriced, short overpriced) and does a pair trade need to be in the Same industry?
PB, that makes sense then if the strategy is used for an institution with constraints and the hiring of an outside manager for the alpha. btw, I thought pair trading was from the same industry to achieve beta of zero.