Finding Alphas, 2nd Edition

11The Triple-Axis Plan

By Nitish Maini

The world of quantitative investing is growing extremely rapidly. Quants are developing new ways of predicting market fluctuations by using mathematics, computer programming, and an ever-proliferating array of datasets. Discovering new alphas can be a formidable challenge, however, particularly for new quants. An efficient exploration of the vast universe of possible alphas – what we call the alpha space – requires a structured strategy, an anchoring point, and an orientation technique, otherwise known as the Triple-Axis Plan (TAP).

TAP can help new quants define the alpha space by providing a framework for conceptualizing the search for alphas. It can also help more-experienced quants, who have the ability to define the entities that constitute each axis and then analyze existing alphas in their portfolios, to target their efforts with greater efficiency.

New quants can easily be overwhelmed by the challenge of trying to develop alphas. They ask themselves, “How do I find alphas? How do I start the search?” Even experienced quants working with many alphas can miss key components required to build a robust, diversified portfolio. For instance, one of the most difficult aspects of alpha portfolio construction is the need to optimize the level of diversification of the portfolio. In automated trading systems, decisions on diversification make up a major area of human intervention. It's not easy to visualize the many pieces of the portfolio, ...