Is It Possible to OD on Alpha?

Posted: 3 Apr 2014 Last revised: 13 Nov 2015

See all articles by Zura Kakushadze

Zura Kakushadze

Quantigic Solutions LLC; Free University of Tbilisi

Jim Kyung-Soo Liew

Johns Hopkins University - Carey Business School

Date Written: April 2, 2014

Abstract

It is well known that combining multiple hedge fund alpha streams yields diversification benefits to the resultant portfolio. Additionally, crossing trades between different alpha streams reduces transaction costs. As the number of alpha streams increases, the relative turnover of the portfolio decreases as more trades are crossed. However, we argue, under reasonable assumptions, that as the number of alphas increases, the turnover does not decrease indefinitely; instead, the turnover approaches a non-vanishing limit related to the correlation structure of the portfolio’s alphas. We also point out that, more generally, computational simplifications can arise when the number of alphas is large.

Keywords: hedge fund, alpha stream, crossing trades, transaction costs, portfolio turnover, correlation structure, large N limit

JEL Classification: G00

Suggested Citation

Kakushadze, Zura and Liew, Jim Kyung-Soo, Is It Possible to OD on Alpha? (April 2, 2014). The Journal of Alternative Investments 18(2) (2015) 39-49. Available at SSRN: https://ssrn.com/abstract=2419415 or http://dx.doi.org/10.2139/ssrn.2419415

Zura Kakushadze (Contact Author)

Quantigic Solutions LLC ( email )

1127 High Ridge Road #135
Stamford, CT 06905
United States
6462210440 (Phone)
6467923264 (Fax)

HOME PAGE: http://www.linkedin.com/in/zurakakushadze

Free University of Tbilisi ( email )

Business School and School of Physics
240, David Agmashenebeli Alley
Tbilisi, 0159
Georgia

Jim Kyung-Soo Liew

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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