Hedge Fund Replication: Traditional Beta, Alternative Beta, and Alpha

Traditional betas refer to the sensitivity of returns to traditional securities, such as stocks, bonds and cash. Alternative betas represent sensitivity to other systematic market factors, such as credit spreads, higher yielding or ‘carry’ currencies, volatility, illiquidity, and other potential return sources (Exhibit 1). ‘Alpha’ is often synonymous with manager skill, but perhaps is better thought of as that portion of returns not captured by the traditional and alternative betas specified. Executive Summary