Dear Ross,

Thank you for your comment. Note however that KS-PME and, thus, Direct Alpha do not assume beta of one. We discuss this in "Appendix C: Robustness" of the paper that Prasad referenced. For further details, consider Sørensen and Jagannathan (2013) and Korteweg and Nagel (2013) [both available through ssrn].

Note also that with methods like in Ang et al., one cannot obtain fund-specific estimates of alpha or beta. It will have to be an average across a large group of funds.

Still, the estimation error on Direct Alpha / PME might be smaller if one scales SPX returns by beta estimates from Ang et al. or elsewhere (e.g. industry-matched public equity). So the bests of two worlds can be combined in this case.

Regards,
-Oleg