Thursday, December 21, 2006

The alpha beta war against Mutual Funds

While the Mutual Funds are moving into top gear, the detractors are also arming themselves with new jargons. Here comes Alpha & Beta.

Beta is what the fund earns simply by being in the game, and can be measured using the market index that corresponds most closely to its style of investing. We can take the example of Sensex or Nifty50.

And the skills component of our fund managers ( some are consistently beating the market) is alpha.

The very model of an MF is outmoded, argues a large and growing group of financial researchers and professional money managers who are busy describing, building and proselytising for a different way of doing things.

The New Age thinker says there are better ways to get both alpha and beta. For the beta segment, any good index fund will do — and there is no need to pay any manager more than rock-bottom index-fund rates for that. In fact, there is no need for an index fund either. Futures contracts based on the index, or some similar item from Wall Street’s inventory of financial derivatives, will do the job. As to alpha, well, our poor managed mutual fund tries to achieve some sort of market-beating return by one simple means — owning, or in the parlance of the trade, “being long” stocks.

Thanks to DNA for the story.
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