On Friday I had lunch with a colleague that told me about a job interview when he used to be at Goldman Sachs for a position with on the sales team.
Being asked how good he was at sales the candidate - an Insead MBA student - said:
"I will sell your beta as if it were alpha."
If I was sure he came up with this answer on his own, I would have given him the job on the spot. Maybe I would prefer that he had told the truth and explained how he could sell high beta as a good market timing move, but I still fiound it a greant answer. For those of you that don't remember.know what is the difference between beta and alpha, here goes a (maybe not so) simple explanation.
In modern models returns are explained as a function of their exposure to underlying risk factors (like the stok market, liquidity, etc.). A fund that takes up lots of market-related risk will have a high "beta" relative to the movements of the stock market. Thus, any over-performance relative to market would simply be due to higher exposure to risk rather than a superior managerial skill (i.e. a high "alpha") possessed by the fund's manager. Alpha is the return over an above the expected given the fund's exposure to sources of risk.
