What is Alpha? How Investors Should Contextualize Manager Performance

At Novus, it’s our mission to give investors the power to measure and improve investment skill. That’s exactly what we’ve been doing this last decade with a mountain of unwieldy public and private data—containing every conceivable stat on the investment management process—and even some that we created ourselves. Measuring alpha is a big part of why we exist. But what exactly is it? Shouldn’t the idea be completely objective?

In our pursuit of alpha, we must consider the views of many investors and have constructed a flexible framework allowing the investor to superimpose their own perception of alpha onto the data. Accordingly, what seems like alpha to one investor is just beta to another. It’s complicated.

The best way to work out an argument is to find common ground. And one thing on which we can all agree is that alpha is a relative concept, not an absolute. In this piece, we’ll look at some options using a simulated portfolio to drive to the heart of the question, testing each concept for accuracy.

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