Turning Beta Into Alpha

by: Cam Hui, CFA

Joe Weisenthal over at Clusterstock recently reported that quants have become beta chasers:

In a survey of quant investors done by BofA/ML, the number of respondents who say that beta is a key factor in their stock screens, has surged overtime, from less than 20% in the mid 90s to over 70% now.


This observation confirms what I suspected all along - we have returned to a single-factor CAPM framework from a multi-factor APT framework. In other words, investment decision making has returned to either "risk on" or "risk off".

Given the current environment, I chose to turn to active asset allocation and apply a momentum model to the beta decision of others, i.e. the Inflation-Deflation Timer Model, as my principal source of alpha.


Playing poker, not backgammon
Many quants think of investing as a structured game with some randomness thrown in, like backgammon. I believe that in investing, you have to watch what others are doing as well. Don't forget that Edward Thorp, who was one of the original quants, was a poker player.