This is the first in a two-part series on Alpha Vs. Beta.
Relatively stable and buoyant markets may satisfy investors if their portfolios keep pace with key market benchmarks. Yet, more aggressive investors are motivated to “chase alpha” or to outperform benchmarks that indicate a robust and healthy market.
On the contrary, when things turn volatile, those same investors may turn to “low beta” strategies to reduce portfolio risk and achieve more stable returns. As recent years have seen an increase in both economic uncertainty and geopolitical tension, coupled with market volatility, low beta strategies have gained significant favor.
Alpha vs. Beta: What’s the difference?
Recently, we released a whitepaper, Low Beta, High Alpha? Yes!, exploring these seemingly contrasting approaches to investment strategies. So, what is the difference between high alpha and low beta?
- Beta is a measure of the historical volatility of a security relative to the overall market. A low beta strategy involves investing in securities or a portfolio with a low beta value, meaning they have historically proven less volatile than the market.[1]
- Alpha measures a security’s historical returns compared to a specific benchmark. A high alpha strategy aims to generate returns that are not merely positive but exceptionally higher than those of the overall market, without regard to the historical volatility of the securities underlying the strategy.[2]
Diversifying with Beta or Chasing Alpha
The concept of low beta does not mean settling for low returns to avoid risk but instead seeking to optimize returns by minimizing risk, particularly during a market downturn. It’s looking for non-correlated returns but at less market risk than is normally associated with high alpha strategies. These strategies focus on diversification as a means of mitigating risk, while high alpha strategies focus purely on benchmark outperformance.
While high alpha and low beta are not the same, neither are they mutually exclusive. Whether a firm is pursuing low beta or high alpha, a strong operational underpinning will make it easier to navigate market uncertainty, empowering managers with actionable data, analytical insights, and the capacity to implement strategic decisions at scale.
Driving investment performance
The question of whether to pursue low beta or high alpha strategies depends on several factors, including market dynamics and investor expectations. Either way, fund managers require access to accurate, actionable information at scale to make informed strategic decisions. To understand how optimizing operational performance can help drive investment performance, stay tuned for the next post in this series and download our whitepaper, Low Beta, High Alpha? Yes!
[1]Kenton, W. “Beta: Definition, Calculation, and Explanation for Investors.”https://www.investopedia.com/terms/b/beta.asp
[2]Chen, J. “Alpha: What It Means in Investing, With Examples.”https://www.investopedia.com/terms/a/ alpha.asp
