Alpha Generator

An alpha generator in the context of finance or investing refers to a strategy or process that invariably produces exemplary performance. Its performance beats the market or index performance, and that too without adding any additional risk to the portfolio. These could be any securities such as international investments, government bonds, or derivative instruments.

Lately, fund managers and venture capitalists who have performed exceptionally have been referred to as alpha generators. They were formally referred to as emerging managers. This is especially true for investors and funds with an active management approach who want to use the strategy possible for their portfolio’s specifications. 

These funds intend to become the best alpha generators in their segment by investing significant time in timing the market, maximizing economic data, and stock picking. 

The fundamental idea is to find an investment opportunity that the rest of the market has overlooked or ignored. Therefore, such investments are more likely to generate higher returns. However, it takes exceptionally accurate analysis, intense research, and comparison. 

Therefore, it is a highly reliable metric for measuring a portfolio's returns after accounting for and adjusting the risk involved in producing those returns. It is a more accurate measure of risk-adjusted returns than the CAPM (capital asset pricing model).

Generating index or market-exceeding performance is the ideal scenario for any investor and fund manager. The most common strategies used by players in the market to generate these performances include:

• Technical Analysis: Technical analysis is one of the most popular ways to extract alpha. It involves analyzing price and other technical indicators to forecast a security's future performance.
• Machine Learning: An exceedingly popular method to generate alpha today is using algorithms and other machine learning methodologies to predict future movement. These methods analyze a wider range of information apart from technical indicators such as news articles and social media. 
• Fundamental Analysis: As the name suggests, the fundamentals of security are considered before investing. Financial statements and specific numbers within them, such as revenue, cash flow, and EBITDA, are used to determine the viability of an investment.
• Global Macros: Investors use the global macros strategy to invest in assets or specific securities based on macroeconomic trends. Multiple market-beating performances have been recorded with this strategy upon alpha generator reviews being conducted.
• Event-driven: Investments in companies, stocks, or other securities that are most likely to be impacted by recent or upcoming events can be a great way to generate market-beating alpha in any portfolio.

The challenges of even the best alpha generators include:

• Risk Management: All investments come with a certain level of risk. However, with these types of investments, risks have to be calculated. It can be a significant challenge as a miscalculated move can result in significant losses. 
• Efficiency: A primary challenge with these strategies is an efficient market hypothesis. According to the hypothesis, all available information already affects the asset price. Therefore, it is challenging to choose an "unidentified" security and make extra gains from it. 
• Informational Asymmetry: An unfortunate fact of the market is that certain players have access to information that is inaccessible to other players, giving them an undue advantage.
• Technology: Technological advancements have been a boon for traders and fund managers alike. However, some tools need to be more sophisticated and require special training to maximize their benefits.

Now that the theoretical aspect of the concept is out of the way, it is time to establish the real-life application part of the best alpha generator strategies through the examples below. 

Example #1

Christopher has been an investor in the stock market for over a decade. He wants to expand his investing horizons without adding excessive risks to his portfolio. After conducting thorough research and technical analysis of multiple international markets, Christopher found a few interesting patterns. 

He noticed that many institutional investors have been diverting money into developing economies, especially India. Given the rise in the number of unicorns and their young workforce, he decided to invest in the FinTech sector of Indian markets. 

While the market produced 12% returns, his portfolio was able to generate 16% in the same period. 

Example #2

Despite the regular volatility in global markets, India has been a reliable investment destination for global investors, both retail and institutional. M&G Investments’ Vikash Pershad said that India remains the best long-term alpha-generating investment. The fact that it is the most proactive IPO market and its market cap crossed $5 trillion is a testament to Mr. Pershad’s statement.

Alpha generation reviews show that each stock or any other security picked through research has a massive amount of data to process. Therefore, it becomes imperative for investors, fund managers, and market experts to consume, process, and make decisions.

Technology has constantly been updated in the world of investing to reduce the tediousness of the process. Algorithm trading, machine learning, artificial intelligence, and technical analysis software have played a significant role in ensuring that the accuracy of the analysis is always getting better.

As a result, the error count has reduced, and so has the time taken for analysis. The accuracy is also top-notch, as the system catches minute details that the human eye misses most of the time.

It is a well-established fact that every investment comes with its share of risk. Even the best alpha-generation companies need to catch up on a few details. Therefore, it is essential to have a safety net or a Plan B in case any of these strategies fail.

One of the most prominent ways market players manage their risks is by taking calculated risks in the first place. They understand and acknowledge the downsides of a strategy failing to perform as expected. If it works, they celebrate; otherwise, they recalibrate. 

One of the most practical ways to ensure risk levels match an investor's appetite is to rely heavily on research and analysis. These are the pillars of investing at any level. Therefore, investors and managers need to invest their time in analysis to ensure top-notch risk management.