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Buffett’s Alpha

Last Updated on 10 February, 2024 by Rejaul Karim

Buffett’s Alpha,” published in the Financial Analysts Journal by Frazzini, Kabiller, and Pedersen, examines the remarkable Sharpe ratio achieved by Berkshire Hathaway due to significant alpha to traditional risk factors.

However, the alpha diminishes to insignificance when adjusting for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Additionally, the authors measure Buffett’s average leverage at about 1.7-to-1.

Consequently, they argue that the returns of Berkshire Hathaway are not the result of luck or some inexplicable factor. Instead, they stem from the strategic leveraging of inexpensive, risk-averse, quality stocks.

An exploration of Berkshire’s portfolio also reveals that Buffett’s success leans more towards proficient stock selection rather than his influence on management.

Abstract Of Paper

Berkshire Hathaway has realized a Sharpe ratio of 0.79 with significant alpha to traditional risk factors. However, the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.7-to-1 on average. Therefore, Buffett’s returns appear to be neither luck nor magic, but, rather, reward for leveraging cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management.

Original paper – Download PDF

Here you can download the PDF and original paper of Buffett’s Alpha.

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Andrea Frazzini
AQR Capital Management, LLC

David Kabiller
AQR Capital Management, LLC

Lasse Heje Pedersen
AQR Capital Management, LLC; Copenhagen Business School – Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)


In summary, “Buffett’s Alpha” provides valuable insights into Berkshire Hathaway’s successful investment strategy. The study reveals that while the firm has realized a significant alpha in traditional risk factors, this becomes insignificant when accounting for Betting-Against-Beta and Quality-Minus-Junk influences.

Furthermore, Buffett’s average leverage of 1.7-to-1 indicates the returns are not resultant of chance occurrences or enigmatic strategies, but rather the strategic leveraging of cost-effective, low-risk, quality stocks.

Interestingly, a breakdown of the Berkshire portfolio indicates publicly traded stocks perform better than wholly-owned private companies. This suggests that Buffett’s remarkable returns are primarily the result of astute stock selection rather than exceptional management impact.

Related Reading:

Betting Against Betting Against Beta

Low-Risk Investing Without Industry Bets


What is the main focus of the paper “Buffett’s Alpha” by Frazzini, Kabiller, and Pedersen?

The main focus of the paper is to analyze the remarkable investment performance of Berkshire Hathaway, specifically the alpha achieved by Warren Buffett, the company’s chairman and CEO. The paper aims to understand whether Buffett’s success can be attributed to luck or skill, and it investigates the factors contributing to Berkshire Hathaway’s Sharpe ratio.

What key findings do the authors present regarding Berkshire Hathaway’s Sharpe ratio and alpha to traditional risk factors?

The authors find that Berkshire Hathaway has achieved a remarkable Sharpe ratio of 0.79 with significant alpha to traditional risk factors. However, they reveal that the alpha becomes insignificant when adjusting for exposures to the Betting-Against-Beta and Quality-Minus-Junk factors. This suggests that the apparent alpha might be explained by exposures to specific risk factors.

What does the paper suggest about Buffett’s average leverage and its impact on returns?

The paper estimates Buffett’s average leverage at about 1.7-to-1. The authors argue that Buffett’s returns are not merely the result of luck or an inexplicable factor but, rather, the reward for leveraging inexpensive, risk-averse, quality stocks strategically. This insight indicates that the use of leverage plays a crucial role in Berkshire Hathaway’s success.

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