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How understanding the alpha lifecycle can help active fund managers to outperform index funds

In a supplement to our Alpha Lifecycle research, this paper shows that disciplined active managers who are able to exit positions at or near the peak of their alpha curve – typically a 6 month ‘window of opportunity’ per position – can preserve more than 120 bps outperformance (net of fees), per year, vs index funds.

New research into the nature of investment alpha.

In today’s environment, the ability of an active portfolio manager to generate alpha — returns above those of the index — is more critical than ever.  Our research shows that managers do tend to accumulate meaningful alpha, but then often give it back due to biases and poor exit timing decisions.

Learn more about the nature of investment alpha and what active managers can do to sustain it.

Holding the Line

Performance volatility is something that all portfolio managers will experience – but how does it affect their ability to generate alpha? This research paper explores investment winning or losing streaks, and the impact they can have on fund manager decision-making behavior.

Delivering behavioral alpha for investment managers

This case study illustrates how Essentia’s behavioral reporting, data-driven consulting, and intelligent nudges enabled a fund manager to tackle cognitive bias, improve fund performance, and generate a 13x return on his initial $80k software investment.

Representation of a portfolio manager trimming a position in their portfolio

This case study profiles a long-short hedge fund manager who, in working with Essentia, saw a 553bps improvement in performance per annum, largely attributable to better trimming decisions.

Picture of Julian Sinclair, portfolio manager

Julian Sinclair, Talisman CIO, talks about the importance of having a feedback loop in the portfolio management process and how he’s been using Essentia’s software to refine his investment skillset.

Active managers need to start incorporating the lessons of behavioral science if they have a chance of reversing the flow of assets into passive investment vehicles. In this paper, Eric Rovick highlights some of the areas of cognitive risk evident in active investment management and provides a managerial and operational framework for addressing them.

Behavioral books related to financial decision-making and investment management.

The team at Essentia have curated a list of the best reads on behavioral science and its application to finance and investment management. We’re constantly updating this list – if there are any titles you think should be here, please let us know. Happy reading!

Introduction to the behavioral biases associated with financial decision-making.

Whether you’re already acquainted with the principles of behavioral finance, or this is your first exposure to the topic, this white paper provides a practical reference guide to some of the behavioral biases most humans exhibit, but with a focus on those that will resonate with professional investors.

The Human in the Loop Whitepaper

We’re also interested in learning from how behavioral science is applied in other sectors.

In this paper, David Taudevin – a former RAF fighter pilot – provides a fascinating insight into the psychological pressures faced by military aviators. He examines some of the behavioral and human factor initiatives being employed to optimize the flying and combat performance of today’s fast jet pilots.

Introduction to the behavioral biases associated with financial decision-making.

Japanese translation of the white paper Behavioral Finance, Applied.

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