Quant · Core
Alpha
Alpha is return not explained by the risk factors you chose — a residual, not a personality.
Definition
In a factor model, r − (r_f + Σ β_k F_k) is alpha plus noise. Change the factors and you change the alpha. Capacity, costs, and multiple testing eat most claimed alphas.
Why it matters
Fees are justified with alpha. If your factors are incomplete, you are selling beta with a story.
Case
A ‘market-neutral’ book with leftover momentum and low-vol exposures. The reported alpha died when those factors were put in the model.
How to read it
Write the factor list first. Then after-cost alpha and a t-stat that survives the trials you actually ran.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- The Performance of Mutual Funds in the Period 1945–1964Jensen · 1968 · Journal of FinanceJensen’s alpha versus CAPM.
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