Capturing Alpha

Alpha is one of those ideas that once you see it, you’ll find it everywhere. In simple terms, Alpha is a measure of performance when compared to a benchmark. Alpha is how much the measured performance went beyond the benchmark.

In other words: If you have an investment that had a return of 10% and the benchmark hit 8% of return, the Alpha was 2%.

Alpha condenses a few ideas that to me, make a lot of sense:

  • Most of times, you are not alone
  • From enough distance, Competition is all there is
  • When competing, what matters is your relative performance

Capturing Alpha is about not only find advantages, but putting them to work.

A personal story:

at the end of 2019, twitter was bubbling with rumors of the incoming Covid19 pandemic. Enough smart people where aware of it and discussing it that you could have a pretty high level of confidence that something was going to happen.

I used that information to become anxious, buying masks ahead of time and pestering my family.

Some other people shorted the stocks of Cruise companies and made a lot of money.

Despite the fact that Alpha comes from the financial markets and the story I gave you revolves around money, for me, the most interesting thing about this is not the financial aspect.

To be in a position to receive valuable information that could inform your future decisions is only half the game. You also need to be able to utilize the tools that turn that valuable information into actual outcomes in the world.

Because the sources of information can vary, and the types of information can be very diverse, it could happen that the tools you need to capture alpha, change all the time. They are contextual, like all tools. And opportunities coming from disparate domains will always carry this variability with them.

How then, do you develop an ability to capture more Alpha? You surely cannot hope to capture all Alpha, but how could you increase it?

Furthermore, if you are not mathematically or financially inclined, what other tools do you have at your disposal?

This question is a frequent and deep one for me.