Alpha is a zero-sum game, according to David Villa of the State of Wisconsin’s Investment Board. Here he talks about how making the right errors leads to high returns.

Category: Hedge Funds, Video

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7 Responses to “The Price of Generating Alpha”

  1. peterkrause says:

    He seems quite intelligent and completely soldered into his process, but when Mr. Villa talks about paying as little as possible for true generated alpha he loses me. Is he saying he can bargain with a hedge fund manager for a greater percentage of outperformance?

    And if so, and if his own team is paying nothing for their own in-house beta, how low would the hypothetical fund manager have to go on fees on the stripped-out alpha to have any meaningful benefit to the State of Wisconsin? Because I assume they are spreading assets among a goodly number of such managers for safety’s sake. Might be better off cutting staff and office space and bogleheading his way to higher returns.

    • Disinfectant says:

      Yes, large investors can negotiate fees with hedge funds. He’s saying that he will only pay so much to capture true alpha and if the external manager won’t accept his fee structure, then he’ll pass.

  2. capitalistic says:

    Alpha is not a zero-sum game.

  3. ruetheday says:

    How much alpha is actually beta because the benchmark chosen is not reflective of the actual portfolio or the timeframe for which beta was calculated is not representative of the longer run?

  4. capitalistic says:

    Example A-
    Investors A, B and C represent the market.
    All three investors buy a basket of securities on January 2nd.
    In June, Investors A and B exit (to C) and lock in a 12% return.
    C holds on to his portfolio and doubles down via options.
    November 30th, he exits and locks in a 20% return.

    Where is the zero sum effect? If I lock into a 12%, where did I lose? Losing out on alpha isn’t a zero sum effect.

    Alpha is a tactical function of timing and duration, relative to any cost of carry. No one can “manufacture” alpha.