Alternative beta is a type of investment strategy that exposes investors to different market risks than traditional beta or alpha strategies. It involves choosing different markets to place investments, such as emerging international markets or art and ancient wines. Some analysts believe that the alleged alpha of hedge fund investing is actually a type of beta. Investors pursue alternative beta to diversify their portfolios and discover new opportunities for profitable investments.
Alternative beta is a term for a type of risk that investors face. The phrase is used to refer to a type of investment strategy. Investors seeking to profit from alternative beta investments expose themselves to risk in different markets than those using traditional beta strategies, using different methods than those used by alpha investors.
Investors use the Greek letters alpha and beta to refer to different aspects of risk they face in their investments. Alpha is the risk arising from the performance of a single company. Investors chasing alpha try to pick individual stocks so they can outperform the market. Beta is the systematic risk or risk inherent in the market. Investors seeking beta profits look to buy and sell assets at profitable times.
Traditional beta is the systematic risk investors face in the course of their usual investments, such as in the debt and equity markets. Exposing your portfolio to market risks rather than stock selection, but managing which market risks affect your portfolio, is an alternative beta strategy. It is about choosing different markets in which to place your investments. The same tactics as traditional beta investing, however, such as market timing, are used in this type of investment strategy.
The definition of alternative beta is vague because different markets are traditional to different investors. Some investors believe that investing in traditional markets in non-traditional ways, such as bundling debt or equity investments with derivatives, exposes investors to alternative betas. Others limit their definitions to market risks in nontraditional markets that investors can use to diversify their investments. These can be as varied as emerging international markets, art and ancient wines.
One of the most common contexts in which alternative beta is discussed is in the world of hedge fund investing. Hedge fund managers typically hype their skills by attributing their returns to their skill at stock picking; that is, they claim that their results are the result of alpha strategies. Some analysts believe that the alleged alpha of hedge fund investing is actually a type of beta. According to this theory, investing in a hedge fund exposes an investor to risks inherent in hedge funds rather than those specific to a particular manager.
Investors choose to pursue alternative beta because it offers different opportunities than traditional beta or alpha investing. Some prefer beta investing methods over alpha investing methods because they think the returns from alpha strategies are too uncertain or a matter of luck. Branching out from traditional to alternative beta allows investors to diversify their portfolios. They can continue to use methods they are comfortable with as they discover new opportunities for the time markets.
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