Special to AllAboutAlpha.com by: Erik Einertson, CFA, CAIA, First Quadrant, L.P.

Following the asset crash of 2008 and the strong rebound of 2009, much has been made about the failure of alpha to remain uncorrelated to beta. We saw the collapse of some strategies of “alpha” that had produced fantastic risk-adjusted returns throughout the previous decade.

How did this happen? Wasn’t the original goal of an alpha program to deliver excess return without subjecting the portfolio to additional market exposure?

How does an investor know when they are getting market exposure instead of alpha? Often correlations are used, but strategies like Private Equity and Real Estate can smooth their returns, making direct correlations look smaller than they really are. Even passive-options strategies on equity markets with deep out-of-the-money strike prices can also look uncorrelated to market indices until the strike prices are hit in unexpectedly volatile markets. In fact, much of what we consider alpha actually has beta exposure at exactly the times you don’t want it, especially during periods of market volatility like we saw in 2008. In the end, not all types of “alpha” are equal.

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