Public equity investors - why do you deserve to generate alpha?

Acidophilus's picture
Rank: Orangutan | 322

For those of you in public equity investing (long/short, long only, net long, whatever), why do you think you deserve to generate alpha? If you had to explain your alpha by a combo of structural factors, skill, and luck, what would the breakdown be? I've listed a few in each category that I've come across, not an exhaustive list.


1) We work harder than the average investor to uncover granular details that shift the odds slightly in our favor, which adds up over time over many bets

2) We have developed a network across the buyside to source home run ideas, so we don't personally have to generate ideas at high velocity, just one every so often to justify our spot in the network

3) We have better systems and/or access to data sources that aren't widely/cheaply available

4) We are structured more forgivingly, which allows us to ride bigger drawdowns and stay in positions for longer horizons than the rest of the market can


5) We have better fundamental business judgment than the average investor (either from natural brilliance or accumulated experience)

6) We are better at making disciplined asymmetric bets than the average investor

Follow-up question: for those of you who think skill does not make up the majority of your alpha, what is your career game plan? Grab as much while the grabbing is good until you're replaced (if majority comes from structural, you are likely a commodity) or fired (if majority comes from luck)?

Comments (12)

  • Analyst 3+ in HF - EquityHedge
Feb 2, 2020

1/ and 5/ are the only true sources of alpha.

2/ you make this sound like a positive, but its not. Its a trade off in terms of profit vs number of trades (and Sharpe). I would argue it arises from necessity. When a quant fund makes bets across 100s to 1000s of names you need only a small edge. Put another way this is the fundamental law of active management.

3/ this is true for quant also. But usually not scalable or capacity limited.

4/ this is definitely not alpha. I can buy the argument that some funds should be judged on multi year performance. But, then I want to see a longer track record. Also, this implies that the fund is doing factor timing which I will accept as alpha but I've seen very few people do it well.

I would put down a further reason for genuine alpha: ability to exert control. In distressed, activist situations being able to forcibly make changes can be a huge source of alpha that is out of reach for many.

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Feb 3, 2020

My mans has read some Grinold and Kahn

"one for the money two for the better green 3 4-methylenedioxymethamphetamine" - M.F. Doom

Feb 3, 2020

In my case its a little bit of 1 and 2, but at least 80% of it is 5. Probably 90%.

Feb 3, 2020

I exude natural brilliance.


Thank you for your interest in the 2020 Investment Banking Full-time Analyst Programme (London) at JPMorgan Chase. After a thorough review of your application, we regret to inform you that we are unable to move forward with your candidacy at this time.

    • 2
Feb 3, 2020

The heckling is the only part that sucks about it. Otherwise its pretty great, lemme tell you

Feb 5, 2020

The first rule of generating alpha: public equity investors do not deserve to generate alpha.

The second rule of generating alpha: you must be faster if you wish to attempt generating alpha. To do this requires a technological advantage over "most" of the market, or at least over the investors you are betting against.

Third rule of generating alpha: you must be explicit. Since most money is still managed by humans, many trades and investment decisions are filtered through human emotions, which is vague, anti-statistical, and biased. To avoid those mistakes, you must have an explicit thesis in how, when, and why you will be compensated with less risk.

To summarize, if you know that you don't deserve to generate alpha, but are faster than other investors, and have an explicit thesis on why/how/when you'll make money (in excess, with less risk), then the odds of you realizing alpha are higher.

The vast majority of alpha is structural, but few know how to exploit an opportunity with the speed and agility required. That is the skill.

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  • Analyst 3+ in HF - EquityHedge
Feb 5, 2020

No one really deserves to generate alpha. Whether public or private. Speed is one source of alpha but that's a dead end game. In fact, people are willing to wait out 'most' of the market also have an advantage if you have sticky capital. Case in point would be distressed plays or deep value. If your investors willing to ride out draw downs that's a huge advantage.

Agree on most alpha is structural. If you look at market making and latency arbs they all fall into this category.

Feb 6, 2020

Well, we were talking about public equity investing...

About speed, sticky capital is "early" to a deep value play. I'd argue that all sources of alpha are due to speed, though each type of trade may have a different speed timeframe (seconds for lat arb, months for deep value). E.g. DV investor 1 who bought weeks before DV investor 2 was faster.

  • Analyst 2 in HF - EquityHedge
Feb 7, 2020
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