Active Portfolio Management and Positive Alphas: Fact or Fantasy?

Abstract

It is commonly believed that active portfolio management can generate positive alphas.This is partly based on the belief that positive alphas represent disequilibrium returns, which can exist in complex financial markets.In contradiction, this article shows that positive alphas represent arbitrage opportunities, not just disequilibrium returns.As persistent and frequent arbitrage opportunities are much rarer, even in complex markets, Jarrow argues that positive alphas are more fantasy than fact. He introduces the notion of an unobservable factor that can generate false positive alphas, and which resolves the inconsistency between common belief and the sparsity of positive alphas.