What do you think?
Rate this book
Finding Alpha: The Search for Alpha When Risk and Return Break Down
Praise for Finding Alpha "Eric Falkenstein is more than one of the smartest and funniest people in finance. He's been a banker, a key model builder at a major rating agency, and a hedge fund trader. In this tour de force, he outlines the successes and failures of financial theory applications in the real world from the perspective of an aggressive early adopter of the best ideas in finance. To this day, I think Eric's private firm default model is one of the best papers ever published in applied finance, and this wonderful book falls into the same category."
— Donald R. van Deventer, PhD , founder and Chief Executive Officer, Kamakura Corporation "People dismissed Columbus when he said the world was round. Thank goodness he persisted. Like Columbus, Falkenstein challenges standard thinking, only this time about risk and reward. As the meltdown of the capital markets has shown, the financial industry clearly missed something with regard to risk management. As an industry, we need to consider alternative theories on risk, and clearly Falkenstein is on to something here. Agree with him or not, Finding Alpha is worth a read."
— Kevin M. Blakely , President and CEO,The Risk Management Association "Writing through the lens of an experienced practitioner, Falkenstein digests decades of research in capital markets, financial economics, and investment psychology that have shaped modern investment theory. This text is an excellent companion for portfolio managers, investment students, or anyone seeking to better understand the relationship between risk, returns, and financial reward."
— Todd Houge, PhD, CFA , The University of Iowa How do we find alpha whenrisk does not correlate with return? Finding Alpha is a practical guide to achieving alpha when conventional measures of risk rarely correlate with higher returns. Author Eric Falkenstein-a PhD who has also been a risk manager and portfolio manager—tells the story of alpha from its beginnings to its current reversal, where risk is now evidenced by return as opposed to vice versa. Falkenstein begins by walking readers through the Capital Asset Pricing Model (CAPM), as well as other well-documented theories about risk and return, and explores how these theories measure up to current empirical evidence being documented by researchers and academics. He also outlines a novel approach to the issues of how benchmark risk and investor overconfidence affects expected asset returns, how to understand the nature of alpha and risk, and how to use practical applications of alpha-seeking strategies that he developed as a successful hedge fund manager. Finding Alpha concludes by outlining some real-life applications of alpha in finance and explains how the search for alpha affects the day-to-day life of all financial professionals.
— Donald R. van Deventer, PhD , founder and Chief Executive Officer, Kamakura Corporation "People dismissed Columbus when he said the world was round. Thank goodness he persisted. Like Columbus, Falkenstein challenges standard thinking, only this time about risk and reward. As the meltdown of the capital markets has shown, the financial industry clearly missed something with regard to risk management. As an industry, we need to consider alternative theories on risk, and clearly Falkenstein is on to something here. Agree with him or not, Finding Alpha is worth a read."
— Kevin M. Blakely , President and CEO,The Risk Management Association "Writing through the lens of an experienced practitioner, Falkenstein digests decades of research in capital markets, financial economics, and investment psychology that have shaped modern investment theory. This text is an excellent companion for portfolio managers, investment students, or anyone seeking to better understand the relationship between risk, returns, and financial reward."
— Todd Houge, PhD, CFA , The University of Iowa How do we find alpha whenrisk does not correlate with return? Finding Alpha is a practical guide to achieving alpha when conventional measures of risk rarely correlate with higher returns. Author Eric Falkenstein-a PhD who has also been a risk manager and portfolio manager—tells the story of alpha from its beginnings to its current reversal, where risk is now evidenced by return as opposed to vice versa. Falkenstein begins by walking readers through the Capital Asset Pricing Model (CAPM), as well as other well-documented theories about risk and return, and explores how these theories measure up to current empirical evidence being documented by researchers and academics. He also outlines a novel approach to the issues of how benchmark risk and investor overconfidence affects expected asset returns, how to understand the nature of alpha and risk, and how to use practical applications of alpha-seeking strategies that he developed as a successful hedge fund manager. Finding Alpha concludes by outlining some real-life applications of alpha in finance and explains how the search for alpha affects the day-to-day life of all financial professionals.
298 pages, Hardcover
First published May 18, 2009
3 people are currently reading
146 people want to read
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 4 of 4 reviews
January 6, 2022
You get an excellent tour of the history of the CAPM, it's issues, and the many many attempts to fix the model in the first few chapters. Many ideas have been tried several times: e.g. considering higher moments. This is useful to know because these ideas are not successful/popular enough to become entrenched whence they fade and are "rediscovered" again and again; only to fade again.
There's also a fantastic chapter on why relative utility generates no risk premium.
Other parts of this book are musings and whatnot about work and career... some bits are useful (e.g. the differences between MDs/salespeople and quants) but most of it was skimmable.
There's also a fantastic chapter on why relative utility generates no risk premium.
Other parts of this book are musings and whatnot about work and career... some bits are useful (e.g. the differences between MDs/salespeople and quants) but most of it was skimmable.
October 17, 2022
Instead of Finding Alpha, Falkenstein’s book ought to be called Killing Beta. The central tenet of the book is that more risk does not beget more return. Specifically, Falkenstein argues that the Capital Asset Pricing Model (CAPM) and its intellectual descendants – Arbitrage Pricing Theory and the Stochastic Discount Factor – are wrong. Not incomplete, but simply wrong. Needless to say, this flies in the face of most of financial academia (though many of the ideas have now gained acceptance among practitioners).
Falkenstein traces the history of the CAPM, outlining the intellectual milieu that produced it (the “Physics envy” of post-Samuelson economics) and the early empirical results that seemed to support it. Having trained under some of the finest financial economists of his generation, Falkenstein can hardly be accused of misunderstanding the subject matter; his explanations and derivations of the CAPM and APT are first-rate. He takes a highly methodical approach to analyse the assumptions on which these theories rest, then, with a Feynman quote as a North star, he proceeds to dismantle the CAPM: “It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong”.
What distinguishes Falkenstein’s critique from other anti-establishment thinkers (such as the Mandelbrots and Talebs of the world) is that he provides a competing theory – in the words of Andrew Lo, “it takes a theory to beat a theory”. His core postulate is that investors care not about absolute risk, but relative risk; the worst case for any individual is to lose money while their neighbour is making money. With this one simple statement, which seems at least as plausible as the “absolute concave utility” assumption of the CAPM, risk premia evaporate, and beta along with it. As with Einstein’s relativity, from a simple new postulate springs a theory which explains the facts better than the current paradigm.
Finding Alpha is an intellectual treat and an excellent antidote to academic dogma (not just financial). Falkenstein meanders widely through epistemology, the history of science, and his own personal experiences of academia. This perhaps makes the book tough to recommend to a specific audience. But if we adopt an information theory mindset, information is really a measure of surprise – unexpectedness relative to the distribution. In that regard, Finding Alpha is a deeply informative gem that seems to have received far less attention than it deserves.
My highlights here.
Falkenstein traces the history of the CAPM, outlining the intellectual milieu that produced it (the “Physics envy” of post-Samuelson economics) and the early empirical results that seemed to support it. Having trained under some of the finest financial economists of his generation, Falkenstein can hardly be accused of misunderstanding the subject matter; his explanations and derivations of the CAPM and APT are first-rate. He takes a highly methodical approach to analyse the assumptions on which these theories rest, then, with a Feynman quote as a North star, he proceeds to dismantle the CAPM: “It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong”.
What distinguishes Falkenstein’s critique from other anti-establishment thinkers (such as the Mandelbrots and Talebs of the world) is that he provides a competing theory – in the words of Andrew Lo, “it takes a theory to beat a theory”. His core postulate is that investors care not about absolute risk, but relative risk; the worst case for any individual is to lose money while their neighbour is making money. With this one simple statement, which seems at least as plausible as the “absolute concave utility” assumption of the CAPM, risk premia evaporate, and beta along with it. As with Einstein’s relativity, from a simple new postulate springs a theory which explains the facts better than the current paradigm.
Finding Alpha is an intellectual treat and an excellent antidote to academic dogma (not just financial). Falkenstein meanders widely through epistemology, the history of science, and his own personal experiences of academia. This perhaps makes the book tough to recommend to a specific audience. But if we adopt an information theory mindset, information is really a measure of surprise – unexpectedness relative to the distribution. In that regard, Finding Alpha is a deeply informative gem that seems to have received far less attention than it deserves.
My highlights here.
February 5, 2017
Good book, consist from bunch of essays written by different author. Quite briefly explain some basic of trading, fundamental analyses etc.
Just last part where author give manual to his simulator platform WebSim little bit spoil the book.
Just last part where author give manual to his simulator platform WebSim little bit spoil the book.
August 24, 2019
Offers different insights into investing psychology than any other book I've read.
Displaying 1 - 4 of 4 reviews