Cameron Hight
August 02, 2016
President & Founder | Helping Investment Managers Optimize Their Position Sizing Process

5 Ways Analysts Benefit from Alpha Theory

Alpha Theory is generally thought of as a portfolio management tool where the analysts enter inputs and the portfolio manager makes decisions. But Alpha Theory is designed to make analysts’ lives easier and their contributions more impactful. Here are 5 ways that Alpha Theory makes a difference for analysts.

Accurate research

Alpha Theory is the synthesis of all of your research. There are months of work that go into each idea which is typically synthesized into a conversation or research note. The issue is that the breadth of the conversation or research note is still too vast to make an accurate decision. In essence, Alpha Theory becomes the finite description of your extensive research that conveys the most important elements of the research which are; thesis, how much you can make if my thesis is correct, how did I arrive at that value, how confident am I that my thesis will transpire and what is my downside risk if my thesis does not come to fruition. These become the tools for you to describe your research and relate the portfolio impact more effectively. Not only does the explanation become more salient, but your conviction level improves by being able to articulately describe how this particular asset will positively impact performance.

Know when to pound the table or pull back

Alpha Theory gives you a top‐to‐bottom insight into idea quality. You can see the real‐time rank by risk‐adjusted return for every asset that you cover, including ones that are in the portfolio, ideas and even the archived names that you have worked on in the past. It is easy to pull up your logic behind recommendations and stress‐test assumptions to help increase conviction. This gives you a quick snapshot of the assets where you should be asking for more exposure and the ones you should be trimming. The active participation of the analyst in notification of add/trim decisions is welcome in a majority of shops because if there is a large discrepancy in optimal and current exposure then that discussion is a worthwhile use of analyst’s and PM’s time.

Makes you a better analyst

When I was an analyst, I know that a majority of my efforts were spent finding information that supported my thesis. I did not do it consciously, but because my initial assessment was that I liked the idea, I found supporting evidence. This is called Confidence Bias. An easy way to fix the problem is to use Scenario Analysis. As an analyst, if you force yourself to evaluate not only your thesis but a definitive downside risk and conviction level then you end up searching out information that more completely describes the asset’s potential and you overcome the deleterious effects of Confidence Bias. Additionally, because research is now distilled down into thesis, downside and conviction level; you do a better job of determining which information has the greatest bearing on those factors and are quicker to weigh the relevance of information. In an environment of unlimited information, it is critical to quickly assess information impact. Alpha Theory’s scenario‐based platform is a template for concise analysis of the factors that have the greatest impact on results. Using scenario analysis is one of the single greatest strides a firm can make in their investment process and it is almost guaranteed to make you a better analyst.

Makes your colleagues better analysts

Your ultimate benefit is in part dictated by the performance of other analysts. By using Alpha Theory, you encourage your colleagues to utilize Alpha Theory and improve their analysis and decision making. Your success will lead to their success. Through this collaborative usage, the firm develops a common vernacular for idea discussion.

  Improve returns

The goal of Alpha Theory is to ensure that the firm’s best ideas are the largest positions down to the weakest being the smallest at all times. Efficient position sizing has a dramatic impact on fund returns which directly impacts an analyst’s compensation. Improved performance will also enhance the fund’s ability to raise capital. Institutional investors also like to see discipline around position sizing and transparency of decision making. Lastly, Alpha Theory gives you the ability to monitor your contribution to performance and measure the differential between what was recommended and what was actually implemented. These are critical factors that directly impact your compensation. In short, Alpha Theory improves returns, helps raise capital and allows you insight into your contribution, all of which determine your compensation. Even if you are the only person in your firm using Alpha Theory, you would still benefit from managing your research in Alpha Theory. Your use of Alpha Theory pays for itself with more accurate research, better awareness of when to add and pull‐back position size, helping you jump the confidence bias hurdle, and most importantly improving returns. Alpha Theory requires effort but the sacrifice is paid back many times over in improved performance.


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