Vol. 17, No. 3, 2019
Aaron Brown and Richard Dewey
We set out to investigate whether “Bond King” Bill Gross demonstrated alpha (excess average return after adjusting for market exposures) over his career, in the spirit of earlier papers asking the same question of “Oracle of Omaha,” Warren Buffett. The journey turned out to be more interesting than the destination. We do ﬁnd, contrary to previous research, that Gross demonstrated alpha at conventional levels of statistical signiﬁcance. But we also ﬁnd that result depends less on the historical record than on whether we take the perspective of academics interested in market efﬁciency, investors picking a fund or someone (say a potential employer) asking whether a manager has skill or is throwing darts to pick positions. These are often thought to be overlapping or even identical questions. That is not completely unreasonable in equity markets, but in ﬁxed income these are distinct. We also ﬁnd quantitative differences, mainly that ﬁxed-income securities have much higher correlations with each other than equities, make alpha 4.5 times as hard to measure for Gross than Buffett.We do not think our results will have much practical effect on attitudes toward Gross as an investor, but we hope they will advance understanding of what alpha means and appropriate ways to estimate it.