Factor Exposure Is Not Alpha
Distinguish alpha from systematic factor exposure when evaluating performance.
Core distinction What is factor exposure? A systematic return driver shared across many securities, such as market, size, value, momentum, or profitability. Factor exposure can be intentional and valuable, but it is not the same as stock-specific alpha. Alpha test Raw excess return versus factor-adjusted alpha The residual is where the manager-skill debate gets sharper. Committee objection The sleeve beat by 600 basis points, so the manager clearly added alpha. The sleeve had large small-cap and value tilts during a factor rally. Your line The return is good, but we need to separate factor tailwind from residual selection before calling…
Sign up free — one personalized lesson every day, matched to your role and goals.
Already have an account? Sign in