Vega

As all portfolio managers who have ever bought an apartment know, in the immortal words of Candadian songstress Suzanne Luca:

My name is Vega

I live on the second floor

I lives upstairs from you

Yes I think I've seen you before

Vega is, technically, "the rate of change in volatility of an option", meaning the greater the volatility the more vega you have. Volatility is affected by a number of things, but most commonly by leverage - or borrowing money from the bank to make more of a speculative investment than you can actually afford. Hence the smarty-pants reference to apartments for, if you've ever bought one with the assistance of mortgage finance, you've amped up your vega.

Vega is also one of the Greeks. As classicists are fond of reminding the youngsters, Vega is not actually the name of any Greek letter (the Greek letter "v" is called nu), but this only goes to show portfolio managers tend to know more about Canadian singer songwriters than they do about classical typography. And if you didn't know that you've got bigger things to worry about.

Anyway, vega is relevant, if you're really interested, in the calculation of Black-Scholes formulae for pricing European options, but it is more relevant in that it is frequently (and some might say) wilfully) mistaken for alpha by uninspiring fund managers and their associates. If you ever see the expression leveraged alpha you may be fairly sure there's some buffoonery at work, and the victim of it is most likely to be you.

Leveraged Alpha

Snake Oil, basically.

Leveraged alpha is technically possible, but in practice harder to find than the proverbial West Coast Pub on Anzac Day. 

what most people claim to be leveraged alpha is, usually, really plain old vega - that is, just leverage. If your market benchmark is beating the borrowing rate, you will make money by borrowing.

If someone pitches "leveraged alpha" product to you, they are most likely a charlatan - which you would expect, it being the financial markets and all - and a mediocre manager. Especially if they use backtesting to demonstrate their historical alpha.

Go hunting for charlatans here. 

Greeks

It is a little-known fact that the expression "beware of Greeks bearing gifts" is not an oblique reference to the Iliad, but in fact a truism handed down through generations of portfolio managers warning their young kinfolk about the perils of option pricing. The full expression is:

Beware of Greeks bearing gifts, especially vega and leveraged alpha.

Greeks, in financial argot, refer to letters in the Greek Alphabet - alpha, beta, delta, and vega*, and they are approximations representing the market sensitivities of options or other derivatives. Each Greek measures a different aspect of the risk in an option position. Through understanding and managing these Greeks, financial market participants can manage their risks appropriately, whether they deal in OTC or exchange-traded options.

Through mangling them, and particularly by conflating alpha and vega, less talented market participants can make their structured products sound a lot cleverer and more exotic than in truth they really are.

*Classicists may notice that Vega isn't actually a letter in the Greek Alphabet, but a Canadian Singer-Songwriter.

Alpha

"Alpha" is a buzzword beloved of unimaginative derivative salespeople and second-rate hedge fund managers and hence was much abused in the run up to the great financial crash of 2008. Like many financial buzzwords, it is derived from a technical term in portfolio management theory which does actually mean something, though through long misuse in the hands of such charlatans the original, literal meaning has fallen almost completely out of use.  

In a technical sense, alpha is a measure of market outperformance: it gauges the variance of a portfolio's performance over the market average, or "beta". An investment manager's alpha, therefore, is the added value that manager brings you that you would miss out on if you just invested in the benchmark. 

Hence why it's so popular in enhanced acronyms, tending as they do to be a means of hawking a new products, which one likes to imply will be better than everything else out there. Alpha is thus a catch-all buzzword which more or less stands for "really cool". And when have you ever known a salesman not to think his product is really cool? Also, it's a vowel, and you need lots of vowels to make good acronyms. 

The love-hate relationship between Alpha and Vega

All this talk of greeks brings to mind the critical distinction between alpha, beta and vega. Strictly speaking, the measure of alpha excludes the amplifying effects of leverage (borrowing to invest in the strategy, magnifying profits and losses of a dollar invested). Leverage increases the volatility of portfolio returns. But volatility is measured by vega, not alpha. While fund managers, and in particular rubbish ones, are very keen on conflating these two, they are, in fact, very different.

For one thing, it's much easier to create vega: anyone and, indeed, everyone can: you simply introduce leverage. (Have a mortgage on your house? congratulations; you've generated vega).

Alpha, on the other hand, really is special, since QED only a certain portion of the market can generate it. Because it's an expression of variance from a mean, for every whizzkid who generates positive alpha, someone's generating an equivalent amount of negative alpha (i.e., returns than are worse than the market alpha).

Why you should run for the hills when you see a product called Leveraged Alpha

"Alpha" was a far more credible label when hedge funds were a small segment of the market comprising the crème de la crème of the city's trading talent - the Soroses and GLGs of the world, who really could outperform the rest of the market. If someone is incautious enough to claim they're generating leveraged alpha, they're either so stupid as to admit they're really just gearing the shit out of your investment (if it goes wrong, guess who loses?), or they think you're so stupid you won't understand that. And quite possibly both.