Beta & Alpha

From ‘Professional Adviser’ comes an article titled ‘Taking a Bet?’. An excerpt:

“A traditional investor invests on the basis of expectation and hope. The expectation is that they will enjoy the market return (Beta) and the hope is that their manager will produce something on top of that (Alpha). The problem is that Beta is now commoditised, and can be accessed for as little as 0.2% annually. Consider this in the context of a typical active long only manager where 90% of returns are derived from market exposure (Beta). That means the client is paying 1% annual management fees yet receives only 10% potential Alpha. That translates into an overpayment of Beta of somewhere in the order of four and half times.”

Without the jargon this means what? Billions are being paid in fees to mutual funds to deliver something that is basically free now. Article (PDF).

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