Andrea Eisfeldt, Hanno Lustig and Lei Zhang: To Grab Expected Excess Return, the Hard Part is Designing Just the Right Tracking Portfolio →
For expected excess returns—called “alpha” by the cognoscenti—to continue to exist, they must be hard to harvest. This article points to why some types of alpha are hard to harvest by anyone other than sophisticated hedge funds. Here is a key passage:
The structure of hedge funds lends itself to the world of complex assets, where extracting value works best with a two-step strategy: a long position in the asset that is focused on grabbing the potential alpha, along with a tracking portfolio run to hedge. It’s the latter that keeps demand lower. “Because each investor has their own model and strategy implementation, tracking portfolios introduce investor-specific shocks,” said Eisfeldt. That is, you’re only as good as your execution on the hedging side.