Erasing Alpha
How much capital must move to eliminate the alpha of an investment strategy? We address this question within a stock-level equilibrium framework that delivers a transparent decomposition of alpha erosion into three components: price impact, its pass-through into expected returns, and the ownership overlap between the targeted portfolio and the source and destination of capital. Focusing on the value strategy, we find that alpha is remarkably hard to erase: even reallocating the entire growth-fund AUM into value funds reduces value alpha from 5.6% to only 4.9%. This modest erosion implies a value capacity of about $3.1 trillion, and alternative funding sources yield even larger capacity. The same reallocation generates a whack-a-mole spillover by raising momentum alpha. Our results suggest that even capital flows large enough to generate meaningful price impact translate into only modest changes in alphas, and that overlapping portfolio holdings can mechanically redistribute alpha across strategies rather than eliminate it.
Andrea Tamoni
Andrea Tamoni is an Associate Professor of Finance at the University of Notre Dame. Previously, he held positions at Rutgers Business School and the London School of Economics and Political Science. Andrea earned his Ph.D. from Bocconi University and was an Associate at Deutsche Bank prior to his doctorate.
Andrea specializes in empirical asset pricing, macro-finance, and financial econometrics. His current research examines the impact of investor demand on asset prices and returns. He has also investigated the dynamics of stock and bond returns and the interaction between monetary and fiscal policy with the term structure of interest rates. His work has been published in top journals like the Journal of Financial Economics, Review of Financial Studies, and the Journal of Financial and Quantitative Analysis.
Andrea has designed and led courses on Investments, Financial Derivatives, Fixed Income Markets, and Financial Econometrics at the MSc., Executive, and Ph.D. levels.