Alpha generation platform

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An alpha generation platform is a technology solution used by quantitative analysts (quants) to develop financial models and create consistent alpha, or absolute returns, i.e., the process of alpha generation refers to generating excess return.^[1] Alpha generation platforms support quants in the creation of efficient and productive alpha generating processes.^[2]

Methodology

Alpha generation platforms are used by quantitative analysts to locate excess return in the capital market.^[1] They enable quantitative analysts to develop complex mathematical and statistical models that help determine whether or not a specific investment is profitable. In many quant-driven funds, these computer-driven models make the final decision on whether to buy or sell an investment.^[3]

The importance of quant funds is increasing as analysts believe that computers' lack of emotion and rapid reaction time make them more efficient and effective in generating alpha, or excess returns. However,a successful fund still requires qualified quantitative analysts capable of developing superior financial strategies and mathematical models.^[4]

Many different alpha generation platforms exist in the market, ranging from commercial off-the-shelf solutions to proprietary solutions developed in-house by large investment banks and funds.^[5] However, all platforms work in a similar manner as they allow quantitative analysts to code models using high-level programming languages such as R, S-PLUS, C#, or MATLAB. Quantitative analysts use these platforms to model and test their financial strategies.

With the average quantitative strategy taking from 10 weeks to seven months to develop, code, test and launch,^[6] quantitative analysts are turning to alpha generation platforms to decrease the strategy development and testing time.^[5] However, it is important to note that alpha generation platforms differ from low latency algorithmic trading systems. Alpha generation platforms focus solely on quantitative investment research rather than the rapid trading of investments. While some of these platforms do allow analysts to take their strategies to market, others focus solely on the research and development of these highly complex mathematical and statistical models.

History

According to a new report released by Aite Group, the demand for alpha generation platforms is increasing rapidly, with market demand expected to reach close to $120 million by the end of 2011.^[5] This demand is driven primarily by the explosion of quantitatively driven funds in the market. According to the Aite Group report, approximately 12 percent of all global assets under management were driven by quantitative analysis at the end of 2007 for a total of $6.65 trillion. This figure is expected to increase to 14 percent by the end of 2010 while the total value of assets under management is expected to increase to $10.86 trillion.^[6]

References

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