A longtime strategy is hot again in hedge-fund world.
Alpha capture strategies take inputs from sources like human traders, market data, sell-side research, and more and then use a systematic process to create a portfolio that is efficiently sized and hedged.
The strategy was pioneered more than 20 years ago by $63 billion Marshall Wace, but the explosion in trading data and portfolio analytics — especially on fundamental traders and their techniques — has made this type of strategy even more appealing. As a result, new entrants are pushing into the space while long-time firms are growing their footprint.
New fund CenterBook Partners is trying to triple its assets to more than $1 billion, while former Point72 president Doug Haynes is launching Norias Research on April 1 and plans to have close to $1 billion. CenterBook uses trading data from dozens of external firms to create its portfolios, while Norias will create its book off the ideas of its fundamental analysts.
Sources say Basil Qunibi, who runs Austin-based Atom Investors and founded manager analytics platform Novus, is planning to fundraise off his strong 2023 when his $1 billion fund returned close to 20%.
Meanwhile, Man Group is building out an alpha capture team within its AHL unit’s special strategies team, a recent job posting states, and Squarepoint is doubling its team, finding external managers for its buy-side alpha capture program.
Squarepoint quant Warren Touwen, who created an alpha capture program for Merrill Lynch close to 20 years ago, said their program partners with funds and pays them quarterly set fees plus a performance-related annual bonus for their trading data. There are over fifty participating funds that are part of the buy-side program, and a perk for top performers: Capital.
Squarepoint has “allocated a substantial amount” via SMA over the last two years to former alpha-capture partners, Touwen said.
“It’s quite hard for independent managers to raise capital,” he said, and participating in Squarepoint’s program gives them another avenue.
And at the largest multi-managers, there’s a focus on continuing to grow their center book strategies, which use the trading data from these firms’ dozens of internal trading teams to create its own, optimized portfolio, several industry sources say.
“It is a way for them to increase their capacity and take in more assets,” said Kevin Lyons, senior investment manager at Abrdn, about the largest platforms growing their internal alpha capture capabilities.
“It’s an arms race type of thing,” he said.
The alpha capture OG
It can all be tied back to the success of the original mainstream alpha capture strategy: Marshall Wace’s TOPS, which stands for Trade Optimized Portfolio System. TOPS is now run by Anthony Clarke, a longtime managing partner at the London-based firm, and has roughly $30 billion in assets spread across different TOPS funds.
That revolutionary strategy took inputs from sell-side research and let its software create a portfolio based on the recommendations from analysts. The newer, buy-side-focused alpha capture strategies take it one step further and use trading data from actual investors — either from internal teams, like those at a large multi-strategy firm, or from external funds — to build their portfolios.
In many ways, this is the latest evolution in the quantamental space — a blending of fundamental and quantitative strategies. When the term grew to buzzword status over the last decade, it was mostly focused on quant tools assisting human stock-pickers, helping them become more efficient.
Now, the discussion has shifted to combining “what machines do best and what humans do best,” said Cameron Hight, the founder of AlphaTheory, a portfolio analytics company that partnered with CenterBook’s executive team to launch the fund.
Hight, whose company has reviewed hundreds of fundamental managers’ trades, said data from his firm shows that a manager could be making, on average, 4% more a year if its portfolio was optimized — meaning no positions were changed, they were just sized and hedged more efficiently.
The reality is, Hight said, it’s not a good use of any human investor’s time to think about this monotonous work on a constant basis. Their skills are better spent finding good ideas, and, industry-wide, firms are starting to agree.
“It’s hot right now, there’s no denying it,” one industry headhunter said.