Active fund selection is a part beta, part alpha decision.
For traditional asset classes, it is a fairly straightforward process. Investors seek an alpha/beta blend. In selecting an active large-cap manager, for example, investors desire a skilled manager who outperforms by investing in large-cap stocks. But alternative investments tend to blur the alpha/beta line, and too often, investors incorrectly base their fund analysis on a belief that alternatives lean closer to the manager skill/alpha side of the spectrum. This thinking can lead to a few key problems when selecting alternatives managers, because unlike the typical large-cap fund, a pure-alpha alts fund has few substitutes, and it is generally more expensive. Conversely, beta is straightforward exposure to an asset class. With beta’s lower cost and ease of comparability, it’s no wonder that fund investors are talking about beta again. But herein lies a problem for alternatives: How do we go about selecting alts funds when the line between what is considered alpha and what is considered beta is so tenuous?