medium · FRM Part 2 Risk & Investment Management
A fund manager claims their high returns come from 'proprietary alpha.' During the ODD process, the analyst discovers the fund's returns load 0.9 on a short-VIX-futures factor. This suggests the fund is primarily earning:
- True idiosyncratic alpha generated purely from the manager's proprietary stock-picking and security-selection acumen.
- Arbitrage profits that are essentially riskless and structurally non-correlated with any broad market or volatility risk index.
- A risk premium for selling volatility (tail risk), which is a 'beta' exposure that should not command 'alpha' fees (2-and-20).
- Operational risk gains resulting from a superior trade execution and settlement infrastructure rather than genuine market-based skill.
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