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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

Content is the opinion of the author and does not represent the position of any other person or entity. Information is from sources believed to be reliable but cannot be guaranteed.

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Alpha generator

originally posted: 11/22/2006  reposted: 8/1/2011

Q: What is an "alpha generator"?

A: An alpha generator is an investment strategy that emphasizes extra risk or reward (although most people would prefer to think only about the reward potential). In other words, it is a strategy that intends to be outside the range of "average" investment performance. This this is a common goal and term used by investment advisers to describe their work. "Alpha" is the term used to refer to the amount a specific investment or portfolio deviates from the overall market average.

In an efficient market the rate of return is directly related to the amount of risk taken by an investor, so an Alpha generator is seeking extra return in return for greater risk. This term might be used to describe a day trader or an investment adviser. Obviously this is a good thing when the market is rising because it means higher rates of return as a reward for assuming a higher risk. But Alpha may also mean larger losses when the market is declining. A common misconception is that an investment portfolio with a high Alpha does not increase in value when the overall market drops in value. A high Alpha means that the portfolio drops even more than the market. A conservative portfolio that bucks market trends would have a low Alpha rating.

An 'alpha generator' is intended to magnify the risk and reward of an investment portfolio.

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