Beta

Allocator relevance: Helps separate market-driven performance from manager skill and informs portfolio risk budgeting.

Expanded Definition

Beta captures systematic exposure—how much returns tend to rise or fall with overall market shifts. In liquid markets, beta is often estimated statistically. In private markets, beta is usually inferred through proxies such as sector exposure, leverage, and cycle sensitivity because pricing is less frequent and more appraisal-driven.

Allocators use beta to understand portfolio behavior under stress, especially when multiple managers share similar exposures.

How It Works in Practice

Allocators triangulate beta through factor exposure analysis, scenario testing, and comparisons to public proxies. They examine whether a strategy’s “defensive” claims hold during drawdowns and risk-off periods.

Decision Authority and Governance

Risk limits and portfolio construction processes manage beta concentration. Governance ensures exposures are monitored and not reintroduced through style drift or unintended overlap.

Common Misconceptions

• Low beta means low risk.
• Beta is stable across regimes.
• Beta can be ignored in private markets.

Key Takeaways

• Beta is systematic exposure, not skill.
• Private market beta is often inferred, not precisely measured.
• Use beta alongside volatility, correlation, and scenarios.