Smart Beta and Alpha analysis

Abstract

Hedge Funds are constantly searching for new investments across the broad spectrum of theories and different financial instruments, to provide returns for their investors. As markets continue to evolve, and investment thesis are more elaborate, the search for good investments, that could generate an excess return, alpha, is also more complicated. Because of this, new quantitative approaches are being used such as the stepwise regression. The idea behind this analysis, is to find the variables, or factors, that could best describe an investment thesis, in order to determine if there is an added value to any particular investment decision. By doing this, hedge funds gain a competitive advantage, as they can hand pick high performing investments that proved to generate alpha. This process is discussed in the present work, for a particular investment thesis, with a precise description of the process used