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Alpha Theory Stock Selection Index - Q1 Performance
In this blog, Cameron Hight and Justin Olson provide an update on the all-time performance of the stock selection index and highlight performance over Q1 of 2024.
In November of 2023, we introduced the Alpha Theory Stock Selection Index as a means to show off the stock selection skill of Alpha Theory managers. In this blog, we provide an update on the all-time performance of the index and highlight performance over Q1 of 2024.
As a refresher, the Alpha Theory Stock Selection Index is a 100 by 100 equity market neutral strategy, created by equally weighing all manager holdings on each side. This equal-weight approach eliminates the impact of position sizing and market exposure, allowing us to better understand the average manager’s stock selection skill.
Index performance in the chart above (yellow line) shows that the index consistently generates positive, low volatility returns across time, suggesting that Alpha Theory managers excel at stock selection.
When assessing the index’s portfolio statistics (table below), we further observe the benefits of portfolio diversification in the total portfolio. The near-perfect inverse correlation of the long and short portfolios (corr: –96.6%) contributes to muted volatility of the combined portfolio when compared to the long and short portfolios (4.88% vs 16% and 18.1%, respectively).
The combined portfolio also realizes improved returns (119.22% vs 168.72% vs -39.35% for long & short portfolios, respectively). The decrease in volatility and increase in returns of the total portfolio results in a Sharpe ratio that is 2.5x higher than the long portfolio or ACWI (1.58 vs 0.61 vs 0.52, respectively).
Q1 2024 Performance
The long and short books ended the quarter at +8.57% and –5.98%, with the total portfolio returning 2.65%.
The ACWI returned 8.21% over the period, outperforming the index. The ACWI’s strong performance resulted in a Sharpe of 3.63 (vs 1.48 for the selection index).
The recent performance of the stock selection index was strong relative to recent comparator periods. This performance is notably better than the fourth quarter of 2023 when the index returned –2.90% and slightly better than 2.33% one year ago.
