April 26, 2011
I started the Alpha Power project some 4 years ago. Always sidetracked by, you also need this or that. I had to prove to myself that the method was worthwhile by setting the mathematical framework where it would have to survive. All the academic papers I read at the time were saying the same thing: If there is some alpha, long term, it will tend to zero and the optimum portfolio over time will tend to the market average. End of discussion. They are still saying the same thing today.
But, I already had this model in Excel using randomly generated price series that showed you could generate alpha and at a high level. I wanted to know why, and from what principles, you could extract some alpha so easily when 75% of the investment industry could not even match the averages.
So, my first task was to prove mathematically you could generate alpha that you could keep long-term, and that was not generated by luck alone. I must have read some 400 academic papers to see all the points of view. But none was showing a glimpse of lasting alpha. Yet, Mr. Buffett has generated 10 alpha points for decades. From my first two papers, you have all the formulas required to build an alpha-generating system. It is not by the price functions that you will win; the price is the same for all. It is by working on your holding function that you can beat the Buy & Hold by simply improving the method a little.
After my last paper, about 2 months ago, I started the process of implementation: finding ways to program this thing according to the methodology. So I can understand the efforts anyone is putting into this.
In all the tests, no leverage was used as of yet. One may imagine what will happen when leverage will be applied. Also, the options program has not been enabled either. Both in tandem would push performance even higher. But again, I’m being sidetracked by other performance enhancers.
Created on ... April 26, 2011, © Guy R. Fleury. All rights reserved.