Idiosyncratic Risk
Idiosyncratic risk is residual variance after the factors — name-specific noise that diversification is supposed to shrink.
Definition
Idiosyncratic Risk refers to name-specific noise that diversification is supposed to shrink. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It shows up in factor research, attribution, and capacity debates — whether a return slice is skill, style, or fee drag. When name-specific noise that diversification is supposed to shrink shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what idiosyncratic risk is saying. If name-specific noise that diversification is supposed to shrink moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Check definition stability across universes, costs, and regimes before treating a backtest as portable. Prefer a short written null hypothesis for Idiosyncratic Risk: what would falsify the current reading in the next window?