Alpha Overlay Strategy
Diversified alpha portfolio
The Alpha Overlay Strategy involves creating a diversified portfolio of alphas, which can be achieved by allowing each manager to diversify their alphas or by using many managers' alphas to create a well-diversified total portfolio of alphas. This approach can lead to radically better results than the traditional portfolio. The strategy involves choosing the best alphas and creating a diversified portfolio of them, which can be calibrated to achieve a higher expected return with comparable risk or a lower risk with a comparable return.
- Diversification is key to achieving better results
- Alpha can be generated in various markets
- A well-diversified portfolio of alphas can lead to radically better results
- Choose the best alphasSelect alphas that are equally good and have a low correlation with each otherPro tipUse a combination of quantitative and qualitative factors to evaluate alphasWarningBe cautious of alphas that are highly correlated with each other
- Create a diversified portfolio of alphasCombine the selected alphas into a portfolio that is diversified across different markets and asset classesPro tipUse a risk parity approach to allocate risk equally across different alphasWarningBe aware of the potential risks of over-diversification
- Calibrate the portfolio to achieve the desired risk-return profileAdjust the size of the alphas to achieve the desired level of risk and returnPro tipUse a risk management framework to monitor and adjust the portfolio's risk profileWarningBe cautious of taking on too much risk in pursuit of higher returns
A portfolio with a limited number of alphas that are highly correlated with each other
A portfolio with a diversified set of alphas that are calibrated to achieve a desired risk-return profile
The Alpha Overlay Strategy was developed by Bridgewater Associates, LP, as a way to improve the results of investment portfolios. The strategy is based on the idea that alpha can be generated in various markets and can be overlaid on top of any asset class.