all alpha welcome alpha is a very important concept in the hedge fund world investors
seek alpha desperately hedge funds try to show that they are indeed generating alpha and it's
not luck or just market returns the industry is obsessed with it look for example at the title of
the conference so alpha is actually a mathematical expression and well known in the investment world
it's the excess return that is not explained by the benchmark in other words alpha is a result
of the skills of the manager or the kind of magic touch if you want i'm not just playing for myself
i'm playing for all shareholders what are the skills how does that compare to real life hedge
funds to answer i'm going to need the help of another expert this time nicholas ravner from
factory research who has that magic touch at axe capital taylor when they spot that a factory that
looks busy is in fact a fraud an article came out on satellite detected discrepancies between
chinese sites and what had been reported by government statistics and after that they knew
they were being watched so the trucks started moving and ben kim when he manages to discover
a merger before it's announced i think there's a merger coming if not an outright purchase axelrod
of course when he understands that what looks like a merger arbitrage opportunity is in fact
he wrote the story now he's out which means you need to be out in fact short so clearly there
are skills involved if you look at each of those the returns are not linked to the market going up
or down this alpha let's start with ben kim i've been tracking rental car usage in business cities
developing relationships with managers there he has to build relationships he has to crunch a lot
of data to find the information that this taylor they're doing web research they're looking at
satellite data find out which satellite company krakow uses ar metrics assuming krakow would be
the biggest user on the most viewed images you deduce that's what he's been looking at and then
actually wrote pages of 1252 when everyone was at lunch which tells me they wanted it to be
missed he's got access to all the information that's stored in his brain in all of them we
see there's an informational advantage they also know what to do with the data or the information
but if they didn't have it in the first place they couldn't do anything so once you have that the
decision process is actually clever but it's also straightforward don't go long go short if there's
dutch people at the airport it's going to be a merger the trucks are show for the satellite
short the stocks so how realistic is it let's ask Nicolas the information asymmetries have largely
been arbitraged away and the reason for that is quite simple because if you think about public
equities it's very difficult for fund manager at jp morgan to have a competitive edge over
someone at goldman sachs because they have the same data bloomberg terminal they have the same
access to management and so on how are they supposed to create our performance
what that means is that what we see in billion is not really what's happening
or very very rarely axe capital is of course our favorite hedge fund it's very special
but there is a Ben Kim and a taylor mason at other firms and in reality it's not about having
a Ben or a Taylor their discoveries would mainly be done by data scientists
using computers and machine learning algorithms because data is becoming better and technologies
become better so nowadays it's quite simple you can go to any you know data provider find
out there's a certain portfolio or certain fund managers you have alpha if you think back 20 years
it was a much more difficult exercise so we can dissect the fundamentals performance very finely
and find out is there really something unexplained the fund manager is doing or is it simply you know
like you know something out of alternate beta space or some sort of mac exposure
that just wasn't measurable before today it's easier to figure out what drives the performance
and to replicate it and that makes it really hard to really create alpha and of course going forward
i think like from an energy perspective this will become even tougher right because data will
continue to improve and technology will continue improve so i think the power partially is shifting
from the fund managers to the allocators results and optics my job's to spot a fund manager taking
his eye off the ball before he strikes out is the effect of being empowered by data technology
and factors in another episode and you can also sign up for my course if you want to dig
deeper into all those components thank you for watching please subscribe comment if you agree
disagree or if i should analyze another scene