On Chasing Alpha

By | October 8, 2009

Stephen Gudeman’s post on the Association of Social Anthropologists’ Globalog series on the financial crisis:

Economists may see economies as flat or smooth plains consisting of markets and market-like behavior that lead to equilibrium situations, but I think they consist of overlapping and conflicting spheres of value and practices. I label these fuzzy-edged spaces House, Community, Commerce, Finance, and Meta-finance. The domains are separate but mingle; individuals and cultures emphasize them differently; their prominence changes over time; and they represent contesting interests and perspectives. The market part of economy, consisting of commerce, finance and meta-finance, often colonizes or cascades into the other two spheres, influencing them to conform to its pattern, although they also help structure market practices. These five domains – from house to meta-finance – exhibit increasing reach in space and inclusiveness of material activities, services, and institutions. They also are increasingly liquid: the speed and number of transactions multiply in the upper domains, especially in meta-finance. This liquidity and ability to shift resources and insert them into different parts of the economy give the upper spheres greater control of the economy and opportunities for sequestering value from elsewhere. Today, in high market economies the financial domains tend to dominate the others for they encompass all value or asset forms, such as land, manufacturing capacity, technology, capitalized human skills and ideas, as well as house production and community sharing.


My story is not finished. With other anthropologists, I have recorded how a house and communal economy that partly relied on self-sufficiency was destroyed by market expansion through the arrival of a cash crop, which was an innovation in the service of efficient production. This shift was driven by the search for profit through commercial operations. More recently we have lived through a commercial outsourcing revolution in high market economies, which includes downsizing to core corporate activities that produce a financial profit; it too is a revolution in efficiency and an example of creative destruction with task specialization. Now we are living through a crisis in the financial sector, done again in the name of enhancing efficiency in the use of capital, and fueled by a focus on “alpha.” Sophisticated professionals talk about the “search for alpha,” which was one of the mantras of Goldman Sachs in New York. Alpha is the label for the excess return relative to a benchmark index; or it is the abnormal return above the expected financial return. A calculated return about other returns (meta-finance), the profit of alpha lies at the center of the finance of finance sphere. Securing alpha became the core competence of financial firms. This ultimate profit on profit was the Holy Grail of Wall Street and the City of London. Economists may not speak about economic bubbles, but certainly we experienced one in the mortgage market, in the stock market and even in high-yielding instruments. But I think they were all facilitated by the bubble in meta-finance, which was the innovation or creation of new instruments, one after another, in an uncontrolled, competitive bout to out-do others and soak up finance. That bubble burst. For example, in 2007, Goldman Sachs’ supreme, task specific hedge fund, the Global Alpha Fund, managed12 billion dollars. But with the crisis, by mid 2008, it was worth 2.5 billion dollars, or 20% of that amount. By April 2009, Goldman Sachs had dismissed its founding managers, who had been lauded as the drivers of this “Cadillac of funds.” I think back to Marcel Mauss and his characterization of the Kwakiutl potlatch as the “monster child” of gift-giving. To gain prestige and out-do others, chiefs ultimately would burn blankets and throw pieces of copper into the sea. Was this destruction different from the financial potlatch in our metropoles?

Read it in full here.

Reblog this post [with Zemanta]