Alpha Decay is a ground-breaking academic paper co-authored by Rick Di Mascio, CEO of Inalytics, Anton Lines from Columbia Business School and Narayan Y. Naik from London Business School.
Using transaction level data from a sample of professional asset managers, the authors observed positive incremental alpha on newly purchased stocks that decays over the twelve months post-trade. The paper reveals that whilst portfolio managers are successful forecasters at short-to-medium time horizons, their average holding period is substantially longer (2.2 years). Both slow alpha decay and the time horizon mismatch can be explained by strategic trading behaviour. Managers accumulate positions gradually and unwind gradually once the alpha has run out; they trade more aggressively when the number of competitors and/or correlation among information signals is high, and do not increase trade size after unexpected capital flows. Alphas are lower when competition/correlation increases.
Download the full academic paper here.
Contact us to learn more about how we analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.