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By: Sam Instone

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June 19th, 2018

Where did all the alpha go?

Investment | Financial Planning

The investing industry often talks about alpha.

In simple terms, alpha is a measure of outperformance compared to the market.

The evidence shows that fund managers are finding it increasingly difficult to generate alpha.

According to a book called "The Incredible Shrinking Alpha", there are 4 reasons..

Authors Larry Swedroe and Andrew Berkin believe a reason why outperformance is becoming harder, is because the “pool of victims” is shrinking.

A bold statement.

Another is that competition is now tougher.

There are a lot of smart people with access to massive data.

A lot of statistical tools, and a lot of computing power.

This is what a human active fund manager is competing against.

The tougher the competition, the harder it is to outperform.

The gap between the best and worst performers has narrowed.

The upshot of this?

The abundance of data and technology makes it much harder for anyone to outperform.

There is, in short, a finite amount of alpha, and it’s now very difficult to find.

And remember, trying to find it costs time and, potentially, substantial sums of money.

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About Sam Instone

Sam Instone, Director at AES International, is passionate about positive change and ensuring international investors get better results.

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