Alpha Capture and Acquired

People are never short of a trade idea. There is a whole industry of researchers, salespeople and amateurs coming up with trading ideas and making big calls on what stock will go up, what country will cut interest rates and what the price of gold will do next. Alpha capture is about systematically assessing ideas and working out who has alpha and generates profitable ideas and who is just making it up as they are going along.

Alpha capture started as a way of profiling a broker’s stock recommendation. If you have 50 people recommending you 50 different ideas, how do you know who is good? You’ll quickly run out of money if you blindly follow all the recommendations that hit your inbox. Instead, you need to profile each person’s idea and see who on average can make good recommendations. Whoever is good at picking stocks probably deserves more of your business.

It has since expanded that some hedge fund have internal desks that are doing a similar analysis on their portfolio managers (PMs) to double down on profitable bets and mitigate risks of all the PMs picking the same stock. Picking stocks and managing a portfolio across many PMs are two different skills and different departments at your modern hedge fund.

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