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Alpha and Beta Separation
Definition
This is an approach to portfolio construction that views investing to earn alpha and investing to establish systematic risk exposures as tasks that should be pursued in separate instances.
Using the term Alpha and Beta Separation :
Jan Jansen likes to get his beta exposure through a low-cost S&P 500 index fund. He then gets his alpha exposure by purchasing a couple of long-short hedge funds that utilize an active investment approach to realize returns.
Pay Special Attention To :
This is a reasonable approach and is more about allocating costs efficiently than anything else. Pay a lower price for beta since it can be generated cheaply and the value is not highly effected by the. Pay more for alpha because you are paying for skill -- it is harder to pick the winners though.
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Related terms
Alpha , Performance Fee , Beta
