Which sectors are the most alpha rich?
Might be a stupid question, but are certain sectors in equities more alpha rich compared to others? If so, how much of a difference does this actually make? My intuition would be that coverages requiring specialist knowledge such as pharma or biotech might provide more opportunities but curious to hear other opinions.
heard gs tmt has fratty, alpha-rich culture
Your intuition is correct.
Presumably alpha richness in different sectors isn't stale, it changes and evolves, e.g. utils rerating YTD, Fins NII accel and then deaccel 21-24, AI cannibalization on seat based SW pricing creating cyclical or structural winner and losers etc. Depends on the changing dynamics in the sectors and perhaps more importantly, your process enabling you to harvest and monetize dispersion / change.
Most pods are obviously divided in to sector specific teams so it's an information edge mostly i'd imagine. I.e. headlines / events -> discriminate info -> measure 2/3rd derivative changes -> view on tickers relative to sentiment.
I'd imagine cyclical sectors with complex value chains should lend itself well to specialization-to-alpha type bets. E.g., healthcare, fins. Or just lots of data rich sectors with tons of direct peers for pairing, e.g. consumer. But there's a degree of that in all sectors more or less...
But yeah... alpha is prob fleeting in nature.
Curious what others think...
Data rich sectors don’t matter. It’s priced in as everyone looks at it.
maybe, but there are defintly ways to approach data in unique / unconventional ways.
For example: you have a view on a mining company that has a new asset and they are going to begin drilling. Last year new ML research came out with a training set on predicting recovery rates of the ore from the ground. Last year, the adjacent mines yielded poor recovery factors. The market / sellside prices in at this level. You have a view that the recovery factor is going to be stronger for this mine. With limited info, you can justify that view fairly fast--doubtful large data providers are using recent research.
The advantage I see with data rich sectors (like NR, financials, healthcare, etc) is you can be creative with how you integrate it into your assumptions. "Everyone has the data" =/= people use it properly and things are going to be priced in immediately. Data-rich sectors should give an upper-hand for someone who has good business intuition + has an eye for ML/timeseries/data-wrangling/etc.
del
Don’t think you know what you’re talking about bud
del
Energy
For E&P, it should be but it’s not anymore. Very few tourist in the space and LO money mostly uninterested. It’s basically just good asset quality/management vs bad and there’s maybe 15 names that anyone looks at. Down cap it’s just oil beta. You can make money market neutral but so much hinges on catching up-downswings in the commodities.
Alpha pool by sector as a thought exercise:
if you were an omniscient all knowing Valuation God who had absolute perfect info your ability to capture alpha would be the delta between what the market believes and what you know
The market will always be able to accurately assess physically constrained goods (capital goods and consumer goods for instance) and isnt likely to misprice that meaningfully versus companies where the primary value is IP (tech, fintech, pharma) or the trust of your client or capital base (FIG)
I think that was what others were getting at earlier
Consumer. There’s just so much dispersion to play with.
Consumer is also the most easy sector to understand and it seems like at my LO all the analysts are forced to subscribe to the same pools of alt data to even keep their heads above the water.
Yep that’s somes it up
What sectors have the most alpha rich? Owners. Entrepreneurship.
The simplistic way to look at this would be to look at intrasector disperson - how much the top performing stocks in a given sector outperform the bottom performers. While imperfect, this gives you a proxy for the amount of L/S spread that is available to capture. You'd want to do a more detailed analysis but the below link shows that consumer discretionary, comm services, and real estate have had the highest dispersion from the 5y ending Jul 2023. Obviously this has the covid period in there so would be potentially skewing the data. On the other end, utes, staples and fins have the least intrasector diversion
https://www.ssga.com/us/en/intermediary/insights/how-to-make-smarter-sector-versus-industry-investment-decisions
Then spot FX would be the highest alpha asset class as it offers the most dispersion(or lowest absorption ratio in precise PCA language). But this is far from the case in reality, it is the worst asset class to look for an edge. And although not a "sector" either, I could make the case that crypto is the highest sharpe asset class to trade in a long-short book, even though it has the low levels of statistical dispersion. Similarly, interest rate curves, intra commodity complex spreads have the lowest levels of dispersion, and Citadel's and Millennium's returns in that space speak for themselves.
Alpha opportunities are independent of dispersion. And you want a stable correlation structure to find reliable hedges.
The highest alpha sectors are the ones with the most idiosyncratic edge. No shit, but theres no other way to put it. People are quick to dismiss consumer as its credit card heavy. But even then, there are so many ways to harvest an edge that it still has ample opportunities.
May I ask how would it be possible to run a l/s at crypto? Considering 99/100 tokens are less liquid and no-cash generated, which seems less applicable for a fundamental approach. Many thanks for your insights in advance.
What do you think about very cyclical sectors? (Housing, Transport…)
Look at industries with the most dispersion in estimates and surprise volatility.
lol dunno why ppl think this is a good indicator. this is literally recipe to blow up
No shit. You just discovered the importance of luck in HF investing.
It goes both ways.
The answer depends a lot on your investment mandate
High correlation / high dispersion is good for mkt neutral - but if that dispersion isn’t actually forecastable (assuming superior work) then it’s not really ‘realizable’ alpha
Liquidity matters in most roles - on a percentage basis small caps prog have alot of realizable alpha, but $ return on time isn’t there at scale
there’s alpha you can capture in a traditional SM model that you can’t in MM, and vice versa
thats not really helpful, I know, but it depends on the person & strategy - if there’s some excess alpha available in a certain sector for a certain fund model, both will be competed away in time
If one sector was visibly more alpha rich than others, then every fund would pile into that sector and drive up prices till there was no longer any more alpha.
that is assuming everyone has equal access to information and equal understanding of where alpha is, which is not the case
“Visibly more alpha rich”
Not a sector, but I'd say crypto probably has the most alpha based on the nascent market dynamics, low regulation, and high information asymmetry. The challenge is capturing that alpha at scale and surviving the volatility.
Couldn't agree more ha. Said as much the same on another iteration of this thread's Q. I'd say most of the actual businesses in the sector (I'd say that title qualifies) are garbage but if we're talking about the ability to consistently generate outsized returns/profits crypto is a great place to be.
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