Alternative Beta refers to alternative systematic risks in the context of Harry Markowitz’ modern portfolio theory. Systematic risks are risks that cannot be diversified away and are compensated through risk premia. Investment theory today commonly separates the return of an investment into the contribution resulting from risk exposure (risk premium) and one resulting from skill-based investing. This forms the academic basis for active and passive investing (indexing).

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  • Alternative Beta refers to alternative systematic risks in the context of Harry Markowitz’ modern portfolio theory. Systematic risks are risks that cannot be diversified away and are compensated through risk premia. Investment theory today commonly separates the return of an investment into the contribution resulting from risk exposure (risk premium) and one resulting from skill-based investing. This forms the academic basis for active and passive investing (indexing). Separating returns into alpha and beta can also be applied to determine the amount and type of fees to charge. The consensus is to charge higher fees for alpha (incl. performance fee), since it is mostly viewed as skillbased. The topic has received increasing levels of attention due to the very rapid growth of the hedge fund industry, where investment companies typically charge fees dwarfing those of mutual funds with the motivation that hedge funds produce alpha. The more discerning investors have started to question whether hedge funds really provide alpha or just some “new” form of beta. Alternative beta, in the context of risk premium oriented investing, is a concept that extends the idea of traditional passive investing into the alternative investment space. To get a better overview of the difference between traditional and alternative betas, it is beneficient to separate them using the following framework.
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  • Alternative Beta refers to alternative systematic risks in the context of Harry Markowitz’ modern portfolio theory. Systematic risks are risks that cannot be diversified away and are compensated through risk premia. Investment theory today commonly separates the return of an investment into the contribution resulting from risk exposure (risk premium) and one resulting from skill-based investing. This forms the academic basis for active and passive investing (indexing).
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  • Alternative beta
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