Pure Alpha Funds: A Guide To Investing Wisely

Bridgewater Associates' Pure Alpha Fund is a global stock market investing strategy based on a risk factor approach. The fund focuses on alpha, which is the return over and above the market return. The fund is managed by Ray Dalio, one of the most respected names in the industry, and it has a history of producing strong returns. For example, in 2008, a year when many hedge funds suffered losses, the Pure Alpha fund returned 19.5% after fees. Investors interested in the Pure Alpha fund can learn more by contacting the firm directly or by working with a financial advisor to determine if the fund aligns with their investment goals and risk tolerance.

Pure Alpha vs Smart Beta

Pure Alpha and Smart Beta are both investment strategies. Pure Alpha is a global stock market investing strategy based on a risk factor approach, while Smart Beta is an enhanced indexing strategy.

Pure Alpha is a long-term investment strategy that uses machine learning and neural networks to create individual portfolios. It focuses on the factors specific to the asset and processes factor values dynamically. Pure Alpha portfolios can show a performance of up to a 2x Sharpe ratio, which translates to a 15-20% yield with 10% volatility, regardless of stock market conditions.

Smart Beta, on the other hand, is a more recent approach to index investing that has gained traction among investors. It seeks to outperform a benchmark index by exploiting certain performance factors. Smart Beta strategies are based on one or more predetermined "factors" such as volatility, liquidity, quality, value, size, and momentum. These factors are attributes that can help drive risk or returns. Smart Beta strategies are typically less expensive than traditional actively managed funds.

Smart Beta strategies are implemented like typical index strategies, with set and transparent index rules. However, they do not track standard indices such as the S&P 500 or the Nasdaq 100 Index. Instead, they focus on areas of the market that offer opportunities for exploitation.

While both strategies aim to enhance returns and improve diversification, there are key differences between them. Pure Alpha is more dynamic in processing factor values, excluding the first Beta component, and focusing on asset-specific factors. On the other hand, Smart Beta strategies are based on predetermined factors and typically have lower expenses.

In terms of performance, Pure Alpha offers a higher potential yield of 15-20% with moderate risk, while Smart Beta strategies have shown strong risk-adjusted returns, outperforming the market over the long term.

Alpha and Beta separation

Pure Alpha is a global stock market investing strategy based on a risk factor approach similar to Smart Beta. Pure Alpha differs from Smart Beta in the way it processes factor values (static in Smart Beta and dynamic in Pure Alpha) and in excluding the first Beta component in the asset risk-return formula. Pure Alpha focuses on the factors specific to the asset.

Alpha and beta are two of the key measurements used to evaluate the performance of a stock, a fund, or an investment portfolio.

Alpha is the excess return of an investment compared to its expected return given its level of risk. It measures the performance of an investment relative to the market, indicating whether the investment has outperformed or underperformed compared to what would be expected based on its risk level. A positive alpha indicates that the investment has outperformed the market, while a negative alpha indicates underperformance.

Beta measures the sensitivity of an investment's returns to changes in the market. It quantifies the volatility or risk of an investment compared to the market as a whole. A beta of 1 indicates that the investment's price tends to move in line with the market, while betas greater or less than 1 indicate higher or lower volatility, respectively.

Separating a single portfolio into alpha and beta portfolios gives an investor greater control over the entire combination of exposure risks. By individually selecting your exposure to alpha and beta, you can enhance returns by consistently maintaining desired risk levels within your aggregate portfolio.

Beta exposure in individual security is not a fixed value over a given period of time. This translates to systematic risk that cannot be held at a steady value. By separating the beta component, an investor can keep a controlled set amount of beta exposure in accordance with their own risk tolerance. This helps enhance portfolio returns by producing more consistent portfolio returns.

Alpha and beta expose portfolios to idiosyncratic risk and systematic risk, respectively. The degree of risk to which an investor is exposed is correlated to the degree of potential return that can be expected.

Pure Alpha performance

Pure Alpha is a global stock market investing strategy based on a risk factor approach similar to Smart Beta. It processes factor values dynamically, excluding the first Beta component in the asset risk-return formula and focusing on factors specific to the asset. Pure Alpha is market neutral and generates income regardless of market conditions.

Pure Alpha portfolios show a performance of up to 2x Sharpe ratio (market index average 0.7x Sharp). This translates to a 15-20% yield with 10% volatility for the investor. The strategy is a long-term investment strategy, with rebalancing of the portfolio occurring once a week.

The minimum capital ticket depends on the amount of capital and can be very high. The management fee is 1.5% per annum, and the success fee is 25% of profits above 5% per annum of the investor.

Bridgewater Associates' Pure Alpha Fund I is the world's largest and perhaps most popular hedge fund firm. It had $160 billion in investments in November 2018. However, a $10,000 investment in the fund in 2013 would have only grown to $11,456 by the end of October 2018. In comparison, a globally diversified portfolio of index funds would have yielded much higher returns, turning $10,000 into $14,229 over the same period.

Bridgewater's Pure Alpha II Hedge Fund lost 7.6% in 2023, with all the losses occurring in the last two months of the year.

Pure Alpha standard portfolio

Pure Alpha is a global stock market investing strategy based on a risk factor approach similar to Smart Beta. The difference lies in the way factor values are processed (static in Smart Beta and dynamic in Pure Alpha) and the exclusion of the first Beta component in the asset risk-return formula. Pure Alpha focuses on the factors specific to the asset.

Pure Alpha systems are market neutral and generate income in any state of the market. The fundamental data ranking of Smart Beta systems is used to filter the securities applicable for Pure Alpha algorithms. The change in individual rankings is then calculated for each security by special algorithms. The size and sign of the position of the respective asset are determined to capture the maximum future return, considering the risk and reliability of the system.

Pure Alpha portfolios show performance of up to 2x Sharpe ratio (market index averages 0.7x Sharp). This means investors can expect a yield of 15-20% with 10% volatility, regardless of stock market conditions.

The Pure Alpha standard portfolio offers exposure to the following risk factors:

• Smart beta
• Interest rate risk
• System alpha

The target rate of return is 15%+ (excluding asset management fees) with 10% portfolio volatility (maximum drawdown of ~15%). The number of assets in the portfolio ranges from 50 to 200 individual tickers, including ETFs. The management fee is 1.5% per annum, with a success fee of 25% of profits above 5% p.a. of the investor. The system is a long-term investment strategy, with rebalancing of the portfolio occurring once a week.

Pure Alpha advantages

Pure Alpha is a global stock market investing strategy based on a risk factor approach similar to Smart Beta. However, it differs in the way it processes factor values. Pure Alpha values are dynamic, while Smart Beta values are static. Pure Alpha also excludes the first Beta component in the asset risk-return formula, focusing on factors specific to the asset.

Pure Alpha systems are market neutral and can generate income in any state of the market. They use machine learning and neural networks to create individual portfolios. The least correlated algorithms are collected in a market-neutral investment portfolio, and the final weighting of positions on securities is made. The holding period for each security ranges from several days to several months.

Pure Alpha portfolios show performance of up to 2x Sharpe ratio (market index averages 0.7x Sharp). This means investors can expect a 15-20% yield with 10% volatility, regardless of stock market conditions.

Pure Alpha is a long-term investment strategy, and rebalancing of the portfolio occurs once a week. It allows investors to get a 15-20% return in USD with moderate risks (10% volatility) regardless of market conditions.

Frequently asked questions