Last Update: August 2021

Just because there are lots of funds doesn’t mean Alpha exists. Take the advantage of your position and know that alpha is on your side as a disciplined trader with your systems.

Pearl Li —

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Portfolio Alpha is considered the active return on an investment, gauges the performance of an investment against a market index or benchmark that is considered to represent the market’s movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha.

Warren Buffet famously said that getting a 50% return on a 5-million-dollar portfolio is so much easier than a 5 billion-dollar portfolio. Clearly, Alpha does exist and luckily, traders with less than 5 million can achieve great returns. Why is that?

One thing the big hedge funds seem to have trouble with is the size of their portfolio. As glamorous as it may be for many to eagerly state their AUM (Assets Under Management) value, they are not able to deliver any returns in reality. The bigger the funds under an investment portfolio, the harder it is to maintain the same level of Alpha. As hedge funds get more and more addicted to raising money, their Alpha diminishes. 

This is the basic concept of diminishing return with portfolio management. In many ways, I am thankful to start out small with far more agility, flexibility and strong alpha characteristics that is often far more achievable as a trader than a big institutional investor. 

Just because there are lots of funds doesn’t mean Alpha exists. Take the advantage of your position and know that alpha is on your side as a disciplined trader with your systems. Don’t let the big guys fool you into believing that alpha is too hard to achieve or too elusive to catch and sustain. 

Stay tuned for my next blog posts in this series: “How to get Alpha” and “How to keep Alpha”.

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