Alpha Trading Strategies

Alpha Trading Strategies - Articles & White Papers

The 'Alpha Trading Strategies' section of the site contains a curated selection of white papers, thought leading insights, and the latest commentary on methods used by global fund managers to generate alpha, thereby deriving benchmark-beating investment returns.

In its simplest form, Alpha measures the difference between a portfolio’s investment return versus the return generated by a corresponding benchmark index. For example, a fund manager investing in a broad array of U.S. stocks would likely adopt the S&P 500 index as their benchmark...

A more sophisticated calculation of alpha may associate alpha with the skill of the manager, stripping out betas and alternative betas, which may (or may not) be unintentional. Alpha is often quoted alongside ‘beta’, the benchmark or market return. A stock with a beta of 1.5 is likely to see a price increase of 1.5% when the benchmark index rises by 1%.

For any given asset class or investment type, there are many possible approaches to alpha creation. Algorithmic and rule-based strategies are increasing in popularity, as is high-frequency trading. The most popular items in our library include research on ‘value vs. momentum’, factor models, smart beta (index enhancing) and alternative beta. Studies on the size effect, share repurchase announcements, return seasonality, pairs trading and relative-value arbitrage, mean reversion, neural networks, and earnings surprises, all explore different paths that can be taken in the quest for alpha.

One of the key dangers when building alpha models is the temptation to overfit the data, to then ‘discover’ spurious relationships which don't persist in real time. Several papers discuss back-testing strategies, model risk, and how to spot overfitting.

Other themes explored include behavioural finance, market timing, tactical asset allocation (TAA), equity valuation, investor sentiment and alternative beta strategies.

Alpha Trading Strategies pertains to:

  • Factor investing (value, size, quality, momentum, volatility)
  • Multifactor investing (combining the above factors)
  • Alternative alpha, behavioural alpha, miscellaneous alpha, systematic alpha

Factor investing is at the core of many investors’ security choices under alpha strategies, and it can be as simple or complex as the investor prefers. Many factors can help analyse asset prices, but the basic factors are: value, size, momentum, quality and volatility. Investors will also prefer different factor exposures depending on their goal. Factor investing strategies are sometimes marketed as 'smart beta' strategies, considering the factors to be alternative forms of beta.

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