Alpha And Beta: Getting The Balance Right With AlternativesAlpha And Beta: Getting The Balance Right With Alternatives

By Richard Brink

Gaining more in up markets than you lose in down markets is at the heart of success in alternative investments. It's not magic - the secret is an effective blend of market and non-market returns.

The difference between success and failure in alternative investments usually comes down to a manager's skill. Specifically, designing a strategy that delivers an effective blend of market returns (beta) and non-market returns (alpha) is imperative to achieving investors' objectives.

UPSIDE/DOWNSIDE: WHY IT MATTERS

As we've discussed, the up/down capture ratio helps illustrate why alternatives, on the whole, have outperformed traditional 60/40 stock/bond portfolios over the long haul. It's not easy to consistently grab more of the market's upside than its downside. In most cases, alpha is the key ingredient - how much value does a strategy add beyond market exposure?

If we look at a hypothetical equity portfolio, we begin to…