What is Alpha
Alpha (α) is a term used in investing to describe an investment strategy's ability to beat the market, or it's "edge." Alpha is thus also often referred to as “excess return” or “abnormal rate of return,” which refers to the idea that markets are efficient, and so there is no way to systematically earn returns that exceed the broad market as a whole. Alpha is often used in conjunction with beta (the Greek letter β), which measures the broad market's overall volatility or risk, known as systematic market risk.
Alpha is the currency by which investment managers sell themselves.
It is any return (or, if you are considering an upcoming investment, projected but not guaranteed return) above the standard broad stock market's return.
So, if investment X returns 10% for the year, and the S&P500 returns 8% for the year, investment X has an alpha of 2%.
The normal way of "getting more alpha in your portfolio" is by selecting better investments and managers with better track records of beating the market.
There is another way - a risk free way - that sophisticated hedge funds use to beat the market and gain an edge, regardless of investment or manager.
In fact, it adds alpha to the entire portfolio, agnostic of investment composition.
The secret, used by any sophisticated family office, is tax strategy, investment planning, and estate planning.
Here are a list of the tools in the toolbox (probably not exhaustive, but these are the ones I think of often), and I will likely go into each one in more depth in following essays:
Tax loss harvesting on a stock (not a fund) level
Automated rebalancing of the portfolio
Upgrading the legal structure around the estate
Liquidity event planning
Investment grade life insurance vehicles
Moving assets out of the estate to grow estate tax free
Charitable reserve trust strategies
Each of these tools has different effects on the estate, but each has the advantage of adding to overall returns with no risk.
For example, if I use tax loss harvesting to avoid 1.5% of tax loss on my S&P500 index funds per year, I have just beaten the market by 1.5% each year without taking any more risk.
That is compelling.
And as my mentor likes to say "any investment in upgrading your estate in these ways should see a 10x return on investment if done right."
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