Devoted to understanding the basics and fundamentals of investing

The return on your overall portfolio will be the simple weighted average of the return streams you choose from the Betas and the Alphas or from the asset allocation decision and the choice of managers. It is important to understand that the return stream from Betas and from Alphas have very different characteristics. Ray Dalio from Bridgewater Associates writes in a memo titled “Engineering Targeted Returns and Risk dated January 10, 2003,

Alphas (managers’ value-added), on the other hand, are plentiful, they are relatively uncorrelated with each other and their returns are unreliable – i.e., their risk-adjusted returns are slightly negative on average and the range around this slightly negative average is very large over long time horizons.

These characteristics of alpha make the rewards and penalties of a) choosing managers and b) balancing their alphas well or poorly, very large.

Unlike the returns that come from beta (i.e., holding asset classes), which you can be confident will be positive over time regardless of which you chose; the returns from alpha might not exist if you do not choose wisely. But, if you select well, you can create a much better portfolio of alphas than you can of betas because you have many more, less correlated and more attractive return streams to combine in an efficient portfolio."