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Alpha, Baby. Alpha.

Alpha in money managementIn the past I’ve pointed out the academic research that explores the value of an “elite” or “target” university degree. To review, there are two key takeaways:

  1. The "elite" or "target" school degree can help you get your foot in the door. Put simply, it can help you break in.
  2. Once you are in, job performance is what matters. The value of the “elite” college degree disappears.

So, what exactly does job performance entail in the investment management business?

It’s all about alpha.

The investment management business, whether you are at a hedge fund or asset management firm, is the quite possibly the closest thing the world has to a pure meritocracy.


Quite simply, the business all comes down to investment performance. Generate alpha and to the victors (outperformers) go the spoils (big bonuses).

For portfolio managers, it’s very easy to measure performance. Either you hit your performance targets or you didn’t. For analysts, the measurement of performance is a little less clear since your PM ultimately makes the investment decision.

At most firms, however, analysts that can generate great ideas will see those ideas implemented in the portfolio. There are two key skills that junior analysts can demonstrate that can improve the odds of success: initiative and influence.

On the initiative front, it means going beyond merely what you are told to do. When they are just starting out in this business, analysts will be given a lot of tasks to complete (usually a lot of financial models). Completing these tasks quickly and effectively is just the start of the equation to success, though. The analysts that succeed and advance are the ones that take their work output to the next level by using their analytical work and generating great investment ideas from it.

The next step is to be able to influence your PM to implement the great idea. This begins and ends with effective communication. If a PM rejects your idea, unless there was a glaring error in your analysis, assume that the idea was rejected because of a failure to effectively communicate the idea. A great idea is nothing if you can’t sell your PM on the idea. The idea needs to be so good that he can't say no.

If you find that your ideas are getting shot down frequently, start keeping track of your recommendations and measure the subsequent performance. See if your ideas really are worthwhile. If your ideas are outperforming, then use your log of recommendations to demonstrate that your ideas matter. Your PM will start to believe in you more if you can demonstrate performance.

Always remember once you start your career: outperform and you will succeed.

{ 2 comments… add one }
  • morealphapls

    Thanks for sharing your experiences. Just got turned on to the site…some good stuff here.

    My goal is to be an alpha-generating trader. I’ve done fundamental stock research in school and have no affection for it. I have some experience as junior sell-side exec. salestrader, MSF, CFA L2. I’ve been told most buyside execution traders are sellside veterans brought over…
    1) how are my chances as a young guy getting into a junior execution role on the buyside?
    2) Would it be a good stepping stone for PM/Trader hybrid type role?
    3) At a traditional AM’er, how easy is it to bypass research analysis and go straight into a junior PM or assistant type role, for instance, assisting with portfolio construction or optimization.

    Thanks for any insights.

  • Dan

    So how is it measured?

    For many investors capital preservation is even more critical than performance. Meaning that a large enough drawdown will not attract a savvy investor even if you have 1000% ROI

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