Beta

Definition

Beta describes how an investment tends to move relative to a market or benchmark. If alpha is the “skill component,” beta is the “market exposure component.” In allocator terms, beta helps answer: what risks am I actually buying? Beta can be intentional (e.g., equity market exposure) or embedded (e.g., credit spread exposure, duration exposure, factor tilts). Allocator Context Allocators use beta to build portfolios deliberately. They often want low-cost beta exposure where markets are efficient and will pay for alpha where skill is plausible and repeatable. The practical concern is mislabeling: strategies marketed as “absolute return” may still carry meaningful equity or credit beta, which becomes visible in drawdowns. Decision Authority Beta exposures are reviewed during manager selection and monitoring. Committees often ask whether a strategy’s outcomes are consistent with its stated portfolio role. If a strategy behaves like equity beta during stress, sizing may be capped even if returns are strong in benign markets. Why It Matters for Fundraising Managers improve credibility by being explicit about beta. Allocators prefer honesty: what the strategy will likely do in equity selloffs, credit stress, or rate shocks. If the manager cannot explain beta exposure, the allocator assumes it is unmanaged. Key Takeaways Beta is market-driven return exposure Hidden beta is a common diligence concern Beta behavior in stress regimes drives sizing decisions Transparency about beta reduces allocator skepticism