Buffett’s Alpha

Andrea Frazzini, David Kabiller, Lasse Heje Pedersen

Research output: Working paperResearch


Berkshire Hathaway has realized a Sharpe ratio of 0.76, higher than any other stock or mutual fund with a history of more than 30 years, and Berkshire has a significant alpha to traditional risk factors. However, we find that 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 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on 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. These results have broad implications for market efficiency and the implementability of academic factors.
Original languageEnglish
Place of PublicationNew Haven, CT
PublisherYale University
Number of pages10
Publication statusPublished - 29 Aug 2012


  • Market Efficiency
  • Leverage
  • Quality
  • Value
  • Betting against Beta

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