Today we bring you part 2 of Erik Einertson’s special to AllAboutAlpha.com “The Five face of Alpha”...

Alpha #2: Insurance Beta

The second type of “Alpha” often found in the market can be referred to as insurance beta or Informationless Investing (Weisman 2002). This type of exposure has persistent tilts towards strategies that have an insurance like payout. The payout for this type of strategy will experience long periods of modest positive returns (and high IR) followed by short periods of large negative performance. While the selling of insurance can be part of a diversified portfolio, it is the tactical use of these strategies that creates real alpha, not the systematic tilts toward these exposures. Unfortunately, many investors in these types of strategies are unaware their portfolios have this type of risk exposure.

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