![]() This ought to have serious implications on work processes and utilization of fundamentally based active management. These shortcomings are a pity, because the main point of harder relative competition for returns are likely correct. The main problem with the book is the blending of correlation and causation, facts and fiction, ex-post and ex-ante and just large-scale confusion of whom this book is really for. ![]() This runs to 90 pages, and the rest is a series of appendices on related studies, references and various advice. The format of the book goes something like this: one chapter each on problems at hand (“No more alpha to chase for active managers”), why it was not a problem before, details about the problem and finally what the solutions are (“here is how we can help”). Where were the momentum-, value- and quality EMH:ers in 1981 when the size-factor was discovered? And what alpha-returns of today will later be labeled beta? Did Buffett make his 1967 acquisition of National Indemnity in an afternoon because he recognized that the P/BV-factor would be the best anomaly to exploit during the next 50 years? Or Coca-Cola in 1988 because of the Gross Profitability Factor that was to be “discovered” by Novo-Marx in 2012? An active manager “exploiting a factor” is now as the authors see it turned into an “evidence-based, transparent and systematic” strategy under the hood of an ETF. So decades after Warren Buffett, Peter Lynch and lesser-known peers have produced superior results, they are removed by the stroke of a pen as “just exploiting a factor”. But the book treats them as predictable stating “once again alpha becomes beta”. All this is of course in hindsight, after the fact. These discovered “anomalies” to the EMH were later reclassified as rational “risk factors”, such as the small cap factor, value factor, momentum factor, quality factor and counting. For those of you who have not kept up with this battle of brains throughout the years, it has got to do with the following: After publishing the theories behind the efficient market hypothesis (EMH) other academics later produced studies that disproved this. But while the books with related topics by John Bogle and Charles Ellis have resonated with me and added to the thinking around indexation, this book merely comes across as trying to make a quick buck.Ī large part of the book is spent on how returns over time have morphed from alpha to beta. This reviewer has a day job of gracing the savannah of active equity management. Berkin works at Bridgeway, an active user of ETFs within their products. One of the authors, Larry Swedroe is a well-known proponent of investing in ETFs, while Mr. The Incredible Shrinking Alpha ́s core purpose is to show that active management is futile and as “alpha has become beta” those futile odds have been lowered even more compared to the 1950s. As a bonus they add appendices that will make you a more informed and, therefore, better investor. They present a list of vehicles to consider when implementing your plan and provide guidance on the care and maintenance of your portfolio. In this greatly expanded second edition, Swedroe and Berkin show you how to develop an investment plan that focuses on what risks to take, and how much of them, as well as how to build a diversified portfolio. They demonstrate that even for the most talented managers, their ability to add value is waning because: the amount of alpha available is declining it must be split among an increasing amount of investment dollars and the competition is getting tougher. Alpha, or outperformance against appropriate risk-adjusted benchmarks, is shrinking as it gets converted into beta, or factor exposures. If you don't yet believe, Swedroe and Berkin provide a compelling case that you're playing the loser's game of active management. If you understand the benefits of indexing, or systematic investing, it will reinforce your commitment while increasing your knowledge. This comprehensive book is the antidote for the active managers' siren song. Active managers persistently lag the returns of benchmarks and index funds that track them, with the excuses for underperformance recycled every year.
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