The Death of Alpha … and Does it Matter?

Recently, we took note of an article in a leading industry publication asking whether alpha was dead. We were particularly interested since recent research at our firm had intimated a similar conclusion. Our look at a group of equity hedge funds revealed that correlation coefficients with the S&P 500 for nearly all of the funds in the sample had risen in recent years to over 80%, and in many cases to over 90%.

Of course, the question of whether alpha is dead, or perceived to be so by the investor class, is crucial for active asset managers: After all the ability to generate alpha is their raison d’etre. While demonstrating alpha is critical to the institutional market, it is not so important for wealth managers. In this era of open architecture, a wealth manager’s quest is to find the best source of alpha to meet their clients’ risk/return needs, but they can just as effectively rely on passive investments if they find that alpha is unavailable through actively managed strategies.

The fact that alpha is typically not the driver of wealth managers’ market differentiation is key to how their services are promoted. The core value proposition of most wealth managers is their understanding of clients’ needs and ability to find the best solution to satisfy those needs. It is not a promise to find alpha where it does not exist.

With or without alpha, many wealth managers have benefited from Optima Group’s ability to identify, define, and communicate their core value proposition to the market.

To learn more, please contact us at 203.255.1066.