Glossary of Alpha Theory Concepts

A measure used in analysis to rank fund managers based on how closely their portfolio weights align with Alpha Theory's suggested optimal weights. Higher adherence is hypothesized to generate more alpha.

A component of the Alpha Theory platform responsible for data aggregation. It connects disparate data sources, including external data (market, alternative, fundamental, consensus estimates, factors, risk data) and a firm's internal research, providing a framework for integrating and managing data alongside third-party information to power investment decisions.

A metric used in analysis, such as the Alpha Theory Stock Selection Index, to decompose daily portfolio performance and classify environments as more "Alpha-Driven" or "Factor-Driven" based on the percentage contribution of alpha to returns.

The portfolio optimization component of the Alpha Theory platform. It is designed to optimally size positions by bringing together disparate data sources.

A configurable visualization and reporting component of the Alpha Theory platform. Alpha View allows users to create customized dashboards and views, define reporting schedules, and set dynamic criteria to receive real-time updates as inputs and forecasts change. It enables portfolio managers and analysts to tailor the way they monitor research, forecasts, risk exposures, and portfolio metrics — providing flexible workflows that align with each team’s investment process.

A component of the Alpha Theory platform that provides data analytics. It utilizes the Alpha Theory All-Manager Dataset to deliver original research, thought leadership, and timely insights designed to help investment managers improve processes and capture more alpha. It helps managers leverage expert advice, suggestions based on their data, and discover areas for refinement.

A dataset utilized by Alpha Insights to provide original research pertinent to investment management. This dataset includes findings observed over multiple years, managers, and price targets, giving confidence in the value of following a systematic approach.

A service offering led by former buyside Chief Risk Officer Benjamin Dunn, partnering with global asset managers and owners to solve complex investing challenges. Client relationships often extend for a decade or more, aiming to define industry best practices.

An analogy used to describe security selection skill, comparing it to how often an investor picks winning stocks.

An analysis related to the "batting average" (security selection) and "slugging percentage" (position sizing) analogy, used to compare a manager's performance in these areas to other fundamental managers.

Alpha generated by overcoming behavioral biases in the investment process. Alpha Theory's platform and methodologies, such as the Confidence Checklist and structured sizing, help mitigate biases that can impact decisions.

An affiliated investment company launched by Alpha Theory in 2021, built in partnership with a select group of Alpha Theory clients. CenterBook Partners is a quantitative investment firm that harvests insights from Alpha Theory client data to build systematic investment strategies. Feedback from CenterBook's strategies provides a broader learning perspective for refining decision-making processes.

The process facilitated by platforms like Alpha Theory where investment teams share insights, challenge assumptions, and refine investment theses for a holistic view of investments.

A white paper from Alpha Theory that discusses data-driven evidence showing why highly concentrated portfolios with the largest positions in the best ideas generally perform better. It is described as Alpha Theory's most downloaded white paper.

Distinct from probability, confidence is based on the belief that forecasts are correct. Alpha Theory provides structured methods like the confidence checklist to measure confidence, helping analysts ensure forecasts are comprehensive and rooted in sound analysis, which builds conviction and guides position sizing.

A tool released by Alpha Theory that incorporates various metrics and factors to help portfolio managers consider a wide range of aspects and avoid biases in investment decisions. It allows managers to quantify subjective factors like conviction and tailor their unique sizing process by weighting factors based on their perceived impact. It helps pull out relevant information from analysts, ensures important factors aren't overlooked, directly connects factors to position sizing, and allows for measurement of efficacy.

A qualitative factor that can be subjective for managers and is normally hard to quantify. Alpha Theory's checklists become a tool to assign a value to conviction, such as confidence that a price will hit its target, making full use of a manager's conviction in sizing decisions.

A theory discussed by Cameron Hight of Alpha Theory regarding the degree to which the correlation of assets can impact a portfolio, noting that it is often underestimated despite the widely understood benefit of diversification.

The potential for loss in an investment. Estimating an explicit downside before including an asset in the portfolio is considered important because downside risk is the true swing factor in portfolio management.

A stage in the structured investment process where theories are validated and refined, and investment opportunities are ranked based on standardized criteria, providing an objective view of risk and reward leading to scenario analysis.

A tool built by Alpha Theory to facilitate easy incorporation of manager research and data into the Alpha Theory platform. It enables users to pull data into the platform and push it out, supporting frequently updated research for better position sizes.

Market environments where market-related "factors" have an outsized influence on price movement and portfolio volatility. Omega Point research shows an increase in such environments since 2020.

The ability of investors to predict future outcomes for securities. Alpha Theory analyzes historical forecasts to provide insights that help refine decision-making and recognize forecasting patterns to improve this skill. Price targets are highlighted as being more predictive of future returns than manager position sizes.

Alpha Theory maintains full version history of forecasts, allowing users to review how expectations, conviction, and key inputs evolve through time. This supports transparency, accountability, performance reviews, and the study of forecasting patterns — helping managers and teams continuously improve forecasting practices.

The importance of maintaining current research and data for positions. Utilizing tools like Excel Connect allows for more frequently updated research which feeds the Alpha Engine, leading to better position sizes and returns.

A sizing process developed with the cumulative wisdom of Alpha Theory's Hedge Fund and Asset Manager clients. It involves capturing and storing all inputs that matter for each investment, outlining best practices for succeeding with this approach. It is presented as a way to transition from intuition-based sizing to a structured, repeatable process, ensuring alignment between research and portfolio construction.

An integrated solution offered through Alpha Theory's partnership with Omega Point that sizes positions using a combination of fundamental research and risk optimization.

The initial stage of the investment process beginning with a spark of intuition about a potential opportunity, which is captured and documented in Alpha Theory for further analysis.

A key consideration in portfolio management, which involves ensuring that idea quality and position size are highly correlated while adhering to risk and exposure constraints.

Environments where price movement is driven more by security-specific factors ("idiosyncratic") rather than broad market factors.

A behavioral bias where managers may overvalue positions they have built themselves due to the effort invested. Coming up with explicit price targets is suggested as a way to mitigate this bias.

The relevant data points captured and stored for each investment that matter for position sizing decisions. These can include price targets, bull and bear case probabilities, qualitative factors (like management quality, conviction), quantitative metrics (like risk scores, ESG scores), overrides, estimates, multiples, fund rules, constraints, and custom fields.

Refers to relying on intuition or internal calculation for position sizing, which Alpha Theory argues is less effective than a systematic process.

The recommended position size generated by Alpha Theory's process, which is based on captured inputs and defined rules. Historical data shows that following optimal sizing recommendations leads to improved metrics.

The critical decision of how much capital to allocate to each investment relative to others in the portfolio. It is presented as a fundamental driver of investment success and a crucial factor, alongside selection, in determining investment outcomes. While extensive literature exists on selection, less focus is often placed on sizing.

Excess return generated specifically through a rigorous and effective position sizing process. Unlocking this alpha is a key focus of Alpha Theory's whitepapers and platform.

A distinction made by Alpha Theory, where probability is associated with potential outcomes for a security and impacts the Probability-Weighted Return (PWR), while confidence is based on the belief that forecasts are correct. Both are independent variables that inform position size.

A precise measurement of an asset's potential impact on the portfolio, calculated by combining investment scenarios and assigning probabilities to them. It is presented as a key input that should be utilized to size positions.

Describes an investment approach that emphasizes structured, repeatable processes rather than solely relying on intuition. Alpha Theory helps managers adopt a process-driven approach to turn intuition into alpha.

Subjective investment characteristics, such as management quality, conviction, business moat, or consumer sentiment, which are important but hard to capture in standard models. Alpha Theory's checklist methodology allows these factors to be documented, quantified, and incorporated into sizing decisions.

Refers to the fundamental analysis, data collection, and evaluation performed by investment teams. Alpha Theory centralizes key data points and facilitates the comparison of theories against consistent characteristics, enhancing visibility and allowing research to power investment decisions.

The incorporation of risk models alongside fundamental research in the investment process. Alpha Theory partners with other firms like Omega Point to unify research and risk models for optimizing portfolios.

Potential future paths for an investment that emerge during the evaluation phase. These scenarios are forecasted for sensitivity of risk and reward and combined by assigning probabilities to calculate the Probability-Weighted Return.

A potential loss of return that can occur when portfolio managers do not take full advantage of their investment research, often due to the lack of a structured data repository for inputs, leading to less effective sizing decisions.

An analogy used to describe position sizing skill, comparing it to how much return an investor extracts from their stock picks.

An approach to position sizing that relies on defined principles, processes, and data rather than intuition. Alpha Theory argues that adding structure to sizing decisions is a high-impact way to enhance portfolio performance.

Analysis focused on understanding and potentially profiting from the costs associated with trading. Alpha Theory and CenterBook Partners have worked to help bridge the gap between quantitative and qualitative worlds by providing insights and tools related to TCA.

The clarity and visibility into analysts' thought processes, data, and decision-making within the investment team. Alpha Theory aims to enhance transparency by centralizing estimates and data, allowing portfolio managers to understand analysis, identify gaps, and refine strategy. True transparency involves understanding why assets are in the portfolio and how their size was determined.

Alpha Theory's mission and core value proposition, which involves guiding investors through a disciplined, data-driven progression to translate initial instinct and ideas into explicit, actionable output that generates returns.

Excess return that is potentially available within an investment team's research and data but is not realized in the actual portfolio performance. Alpha Theory's platform helps managers identify and capture this alpha by enabling them to leverage their research and data efficiently.

The process of bringing together fundamental analysis and quantitative risk assessments, which can be challenging but is facilitated by integrated solutions like the partnership between Alpha Theory and Omega Point.