Abstract
Portfolios can be thought of as being composed of a beta component, which is broad asset class exposure, and an alpha component, which is excess return achieved through active management. If investors are hiring active managers, presumably because they believe these managers have real skill or the ability to deliver alpha, then they ought to be sure that they are paying for true alpha and not beta. These principles are not only applicable to traditional institutional portfolios, such as defined-benefit plans and endowments, but are also relevant for nontraditional portfolios, such as hedge funds.
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