hunting alpha

Hunting for alpha

Today, most of us are investors in one way or another. Pension pots, once managed exclusively by wealth managers, are now seeing a rapid growth in self-management. And through online platforms and digital services, buying shares, bonds, and recently even cryptocurrencies, has made investing more accessible to everyone than ever before.

The democratisation of investing is truly revolutionary, because it offers the individual many of the tools and information that used to belong exclusively to institutional investors. But tools and information alone are never enough; strategy is the key to success. So, what are the investment strategies that everyday investors can pick up from professional traders to generate better returns?

Probably the most known of all is focusing on generating alpha.

Alpha, as in the first of the Greek letters, is a term commonly used by investors, because, frankly, ‘A’ doesn’t sound as cool. It’s as important as the name suggests; alpha is the measure of how much extra return a stock generates, over and above whatever the broader market’s doing. It sounds simple enough; with so many companies out there, surely finding an elite selection of strong performers shouldn’t be all that difficult. Or is it?

In practice, beating the market regularly is pretty hard, even for market professionals. To generate alpha, you need an angle or a vantage point, allowing you to see that some companies are simply worth more or less than the market suggests. So, far from being a snappy catch, portfolio managers work hard at uncovering this elusive and untapped return. Legendary investor Peter Lynch once pointed out: “In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”

There are different strategies to get an edge over others in order to generate alpha;

  • Value investors drill deep into a company’s fundamentals to try to find overvalued or undervalued stocks. A savvy and diligent researcher may uncover an alpha gem by taking notice of a company’s promising technology investment, by realising its ability to cut costs, or by forecasting a rush of demand coming in from Asia next year.
  • Technical investors look at the patterns in the stock’s price levels and volumes by studying historical market data, demand and supply. They believe that history tends to repeat itself when it comes to the market’s overall performance. 
  • Momentum investors look for upward or downward trends building up in the market, and position themselves to benefit from it over a stretch of time. The basic idea is that once a momentum is established, prices are more likely to continue in that direction than move against it.

Private investors can do all this too, but most of us simply haven’t got the time. Also, the cards are stacked against us, the average private investor, because trading as a non-professional often involves overblown commission fees every time we buy or sell.

Sure, private investors can always hand over their money to professional portfolio managers, but that doesn’t come cheap, with management fees cutting into any return you’re making. In fact, sometimes the commissions are so large, they simply cancel out whatever alpha’s been generated.

Now, by thinking outside the box, there’s another opportunity for private investors to generate alpha easily: it’s called securities lending.

You can rent out your stocks, bonds or ETFs to other investors who are looking to facilitate short selling and other trading strategies. They will pay you rent for that, over and above any dividends or price appreciation you may get. So, what does that rent mean for you? Pure alpha.

Sounds novel? Well it’s been going on for over 40 years. Highly effective in generating extra returns, this strategy has been a mainstay in the toolbox of big financial institutions. Think of it this way; you already bought your stocks and took the risk such stocks may go down in value. So why shouldn’t you benefit from an extra income and be fully compensated for the risk you are taking?

Thanks to the rise of digital technology, private investors can now get a piece of the action too. This is a $2 trillion opportunity from which private investors are no longer excluded, and one they should no longer ignore.


Sharegain provides a digital solution that’s simple and smart; we enable our users to capture additional returns from assets they already own. Visit us at Sharegain.com

With securities lending, as with other investment activities, your capital may be at risk.