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What are alpha generating strategies?

An alpha-generating strategy is an investment approach used by portfolio managers or traders to generate excess returns, known as alpha, beyond what can be attributed to the overall market movements or beta. Alpha represents the return on an investment that is not explained by the general market performance.

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The goal of an alpha-generating strategy is to identify and exploit market inefficiencies or mispricings in order to generate positive returns. Portfolio managers use various techniques and methodologies to identify these opportunities, such as fundamental analysis, quantitative models, technical analysis, or a combination of these approaches.

  1. Here are a few examples of alpha-generating strategies:

  3. Long/Short Equity: This strategy involves taking long positions in stocks expected to outperform the market and short positions in stocks expected to underperform. By carefully selecting individual stocks, the portfolio manager aims to generate positive returns regardless of the overall market direction.


  1. Market Neutral: In this strategy, the goal is to create a portfolio that is agnostic to market movements. The portfolio manager simultaneously takes long and short positions with the intention of balancing out the exposure to market risk factors. Profits are derived from the relative performance of the long and short positions rather than from overall market movements.

  2. Statistical Arbitrage: This strategy involves exploiting pricing discrepancies between related financial instruments by using quantitative models and statistical analysis. For example, a portfolio manager might identify a temporary divergence in the price of two highly correlated stocks and take positions to capture the potential convergence.

  3. Event-Driven: This strategy focuses on investing in companies that are undergoing significant corporate events, such as mergers, acquisitions, spin-offs, or bankruptcies. The portfolio manager aims to profit from the price movements resulting from these events by analyzing the potential impact and positioning the portfolio accordingly.

It’s important to note that alpha-generating strategies often involve higher levels of risk and require specialized knowledge and expertise. Additionally, the effectiveness of these strategies can vary over time due to changing market conditions and increased competition.

May 21, 2023

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