Alternate beta is a type of investment strategy that exposes investors to different market risks than traditional beta strategies. It involves choosing different markets to invest in and using different methods than alpha investors. Hedge funds often claim to use alpha strategies, but some analysts believe that this is actually a type of beta. Investors pursue alternate beta for diversification and new opportunities.
Alternate 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 attempting to profit from alt beta investing expose themselves to risk in different markets than those using traditional beta strategies, using different methods than alpha investors.
Investors use the Greek letters alpha and beta to refer to the different aspects of risk they face in their investments. Alpha is the risk of an individual company’s performance. Alpha-chasing investors try to pick individual stocks so they can outperform the market. Beta is systematic risk, or the risk inherent in the market. Investors looking for beta profits try to buy and sell assets at profitable times.
The traditional beta is the systematic risk that investors face in the course of their usual investments, such as in the debt and equity markets. Exposing the portfolio to market risks rather than stock selection, but managing which market risks affect the portfolio, is an alternative beta strategy. It involves choosing different markets in which to place investments. However, the same tactics of traditional beta investing, such as market timing, are used in this type of investment strategy.
The definition of alternate beta is vague because different markets are traditional according to different investors. Some investors believe that investing in traditional markets in non-traditional ways, such as matching debt or equity investments with derivatives, exposes investors to alternate beta. 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, fine art, and vintage wines.
One of the most common contexts in which the beta alternative is discussed is the world of hedge fund investing. Hedge fund managers often tout their skills by attributing their returns to their ability to pick stocks; that is, they claim that their results are the result of alpha strategies. Some analysts believe that the supposed 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 any particular manager.
Investors choose to pursue alternate beta because it offers different opportunities than traditional beta or alpha investing. Some prefer beta trading methods to alpha trading because they think that the returns from alpha strategies are too uncertain or a matter of luck. Branching from the traditional beta to the alternative allows investors to diversify their portfolios. They can continue to use methods they are comfortable with while discovering new opportunities for temporary markets.
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