“The Incredible Shrinking Alpha” – a brief review

shrinking alphaThe ability to beat the market returns is shrinking. This ability is measured by a statistical term called “Alpha.”

Swedroe and Berkin’s book “The Incredible Shrinking Alpha” discusses how Alpha has shrunk, as well as the ability to repeat this feat, called persistency, is low too.

What is Alpha? The ability for a manager to beat some index measurement when adjusted for risk. More importantly, Swedroe and Berkin summarize a lot of research in this short, easy to read book, essentially attributing this phenomena to the competition between active investment managers and ultimately their poor experiences and results move them (and investors) towards indexing (or “closet indexing.)”

They essentially argue that more persistent results come from evidence based investing and such an approach is NOT the same as getting average results (Appendix A).

Rather than an in-depth regurgitation of their work, I suggest those interested obtain a copy and read it for themselves. Much of what you thought you were trying to do when you invest may become crystal clear that your expectations may be way off. The world is much more sophisticated than the single individual investor such that even professionals don’t measure up anymore – and that measurement is called Alpha.

For a more detailed discussion you may read Kitces review as well.


How to build such a portfolio of investments? An overview briefly covered in Chapter 4. Swedroe discusses that more in “Reducing the Risk of Black Swans.”

In the interest of disclosure: I do use DFA (mentioned briefly in their book) sub-managed SA Funds with most clients (not a fund requirement, but a business decision I’ve made). This blog is not a solicitation; simply an explanation of the basic philosophy and approach of the funds.


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