The Performance of Financial Products - Essay Example

Private clients’ preferences on alpha and beta returns – the impact of the recession on the attractiveness of alternatives and structured products

To understand the increase in clients’ preferences on alpha returns it would be necessary to refer primarily to the characteristics of the specific investment; by Dorsey (2007, p.5) ‘alpha often is a virtual catchall for the return generated by an alternative investment that is not considered to be related to equity beta’. The above type of alternative investment seems to be preferred by investors – instead of for the beta return; this differentiation in the investors’ preferences can be explained by analyzing the characteristics of the specific two investment products. The term beta return reflects ‘beta is the amount of return for a security or fund that is explained by its benchmark or component benchmarks’ (Dorsey, 2007, p.6); in other words, the main difference between the alpha and the beta return is that the former focuses on the factors influencing the performance of a specific investment while the latter refers to the market prices in general. In this context, the alpha return is likely to be preferred by investors as it offers a clearer view of the potential performance of a particular investment; the identification of the price of the market to which an investment is related is of secondary importance for the investors of the particular market.

From another point of view, Gregoriou (2008) noted that ‘alpha is commonly used as a measure to assess an active manager’s mean excess return’ (Gregoriou, 2008, p.14); as for the beta return it is characterized as a measure of systematic risk because it only accounts for the market risk’ (Gregoriou, 2008, p.43); the views of Gregoriou on alpha and beta returns are by those of Dorsey (2007); in the studies of both the above researchers the superiority of alpha return towards the beta return is explained by referring to the relationship between alpha return and the performance of an investment – compared to the beta return that reflects the market conditions.

Under conditions of recession, the performance of both the above types of investment is expected to be negatively influenced; the specific fact is verified in the literature; the examination of the impact of the current financial crisis on the investors’ preferences on alternative financial products has led to the assumption that a correlation exists between the recession and the performance of these products; it is perhaps the increase of risk in the financial markets that has led to this phenomenon; the importance of recession is indicated by the fact that because of the crisis ‘Fed had to decrease the interest rates’(Erhardt, 2009, p.17); it is assumed that investors will also change their common investment criteria and practices in periods of recession. From a similar point of view, in the Directive on Alternative Investment Fund Managers (2010), it is noted that regions that are less affected by the crisis, for instance, Asia, would be preferred by fund managers (The Stationery Office, 2010, p.9).

3. Conclusion

The decrease of performance in common investment products (for instance, the property) has led investors worldwide to use alternative investments that can guarantee high performance even in unstable market conditions; alpha and beta returns are preferred by the investors that recognize the value of alternative investments; however, current financial crisis proved that under strong market pressures investors are expected to avoid the alternative and structured products; it is assumed that in the specific case the traditional types of investment are made more attractive to investors guaranteeing a quite low risk of losing the funds invested.