What to Do When Alpha Becomes Beta

The post “What to Do When Alpha Becomes Beta” first appeared on Alpha Architect Blog.


Dynamic Strategy Migration and the Evolution of Risk Premia

  • David E. Kuenzi
  • Journal of Portfolio Management
  • A version of this paper can be found here 
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category

Why does it matter?

I thought this was an interesting take on the mechanics behind the “commoditization” of quantitative strategies.  Although, it does not tell us which risk model is theoretically correct, nor does it answer the question of: “is it alpha or is it beta?”, it does provide an explanation of how the migration from alpha to beta might occur.  Very helpful.  As for application, the author suggests that investors and managers may benefit by providing such a context (“big picture”) when considering their current strategies.  Where are their current strategies positioned with respect to the stylized stages? How does that position impact the development of new strategies and management of strategy timing? How does this framework interact with the recent literature associated with issues of factor crowding?  Good questions to consider for all asset allocators.

The most important chart from the paper


The author creates a conceptual model for risk premia strategies, focusing on the notion of a continuum running from pure alpha to pure beta and where on this continuum a given manager or investor would like to engage with the markets. He suggests that a risk premium that is nearly completely unknown is really a source of alpha, which then becomes more risk premia–like as it gains market acceptance. As such, there is an inexorable pull toward commoditization for any known and profitable investment strategy. A key question for both risk premia asset managers and investors is how to operate in this dynamic environment. The investment manager might consider how to adapt and perhaps research and migrate to new, less-commoditized strategies over time. The investor must decide what mix of managers along this continuum to select. Finally, the author provides empirical evidence that naïve versions of some of the most known risk premia strategies have indeed shown signs of commoditization in the post-crisis period as compared to the pre-crisis period. Broadly, he suggests that in the face of investment strategy degradation, investors and managers must consider adaptive approaches to the markets and to upgrading their strategies or strategy allocations.

Visit Alpha Architect to read the full article.

Disclosure: Alpha Architect

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

This site provides NO information on our value ETFs or our momentum ETFs. Please refer to this site.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Alpha Architect and is being posted with permission from Alpha Architect. The views expressed in this material are solely those of the author and/or Alpha Architect and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.