Today’s equity markets are more complex and varied than ever before. This environment creates structural opportunities for an Alpha Enhanced approach to equity investing, which aims to provide investors can benefit from low correlation to traditional managers, reduced macro biases, and well-diversified portfolios—all while seeking to optimize returns without taking on uncompensated active risk. We believe these factors make a compelling case for using Alpha Enhanced strategies as the foundation of institutional public equity portfolios.
Diversification Driven by the Scalability of Systematic Investing
Alpha Enhanced investment strategies function by executing a high volume of small active bets across various geographies, sectors, and market capitalizations. This diversified method aims to minimize concentration, avoid unintended risk, and maintain a portfolio composition that closely mirrors the benchmark. The primary goal of this approach is to achieve stable and consistent alpha while maintaining a balanced risk profile. These strategies are designed to meet three core objectives:
Consistent positive performance over the long term
Alpha efficiency tied to the tendency for potential risk-adjusted outperformance to be highest at lower levels of tracking error
Risk balance potentially achieved by holding a larger number of names than strategies with a high active weight, and by tracking their benchmarks more closely
To reach these goals, Alpha Enhanced strategies utilize a versatile, risk-managed component that allows investors to deploy their risk budgets more effectively. Tracking-error budgets for these strategies are typically aligned with investor risk appetites, generally falling between 50 and 200 basis points. This additional risk provides portfolio managers with the flexibility to enhance risk-adjusted returns by adjusting weightings based on forward-looking, stock-specific insights.
In practice, this requires a systematic investment framework capable of covering the entire equity universe at scale, even in less efficient markets. Quantitative strategies achieve this by consolidating fragmented data into a single, actionable view, allowing for the consistent application of an investment strategy across all market segments. In our view, this is only achievable through the scalability of a systematic approach. This broad scope allows quant-driven Alpha Enhanced strategies to maintain a large number of positions, which facilitates diversification in line with the benchmark and enables efficient management of tracking error.
We believe this breadth of coverage offers a significant advantage for quantitative managers, as it allows them to apply their investment theses across a vast universe of securities. Consequently, these strategies are capable of generating excess returns without requiring high levels of active risk, even when implemented in a long-only format.
