Understanding Alpha in Hedge Funds

Um, given the rise in quantitative hedge

funds, quant funds, and the

thousands of PhDs trying to create new algorithms, has that made it harder

to create alpha? So, um, can you say what alpha means in the

context

of hedge funds, uh, for people that aren't familiar, and then answer that

particular question?

Well,

when you say alpha, first you have to understand beta.

Hmm.

And, and beta is the, uh,

uh,

the stock market as a whole.

Um, let's say the S&P average.

So you could just, uh, invest in that,

and w- you would be 100% beta. All your return would be, would

come from the, let's say the S&P, the Standard & Poor's

average.

Alpha

is,

uh, a source of, uh, earnings that is

orthogonal

to that.

Hmm.

It's orthogonal to that. And, uh, so that's alpha.

Now, some, um...

Our Medallion fund

is, uh, I think

90% alpha or 95% alpha. It

really doesn't, uh, matter where the stock market is going,

uh, for the Medallion fund. We have, uh...

Now, the Medallion fund is only open to employees

of the, of the company, of Renaissance.

Mm-hmm.

And, and me, of course, uh-

Mm-hmm

... as a founder and shareholder.

Uh, so,

uh,

and, and we have some publicly available funds

which

do have some beta. They're not 100% alpha.

Mm-hmm.

And, but of course, they don't do as well

as Medallion.

But, uh, but they do, uh, quite well until

today. Today they had a bad day.

Oh, I'm sorry.