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Primary Article

Multiple Alpha Sources and Active Management

Eric H. Sorensen, Edward Qian, Robert Schoen and Ronald Hua
The Journal of Portfolio Management Winter 2004, 30 (2) 39-45; DOI: https://doi.org/10.3905/jpm.2004.319928
Eric H. Sorensen
Chief investment officer, Structured Equity, and a managing director and head of Quantitative Research at Putnam Investments in Boston.
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  • For correspondence: eric_sorensen@putnam.com
Edward Qian
A senior vice president, Global Asset Allocation, and a senior analyst at Putnam Investments.
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  • For correspondence: edward_qian@putnam.com
Robert Schoen
A senior vice president, Global Asset Allocation, and a manager at Putnam Investments.
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  • For correspondence: robert_schoen@putnam.com
Ronald Hua
A senior vice president, Core Equities, and portfolio manager at Putnam Investments.
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  • For correspondence: ronald_hua@putnam.com
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Abstract

Active portfolio managers often see themselves as assemblers of efficient portfolios that maximize information ratios through the value-added of their proprietary investment insights (alphas), but approaches to reconciling often-contradicting investment insights differ widely. A linear combination of different investment insights can be used to support an analytical framework that maximizes the information from one single source. Simulations based on this framework reveal the impact of varying two key variables the cross-sectional correlation of alpha signals and the time series correlations of the information coefficients related to alpha signals. The latter plays a more important role, providing diversification benefit to strategy risk over time. This analytical foundation has applications in sensitivity analysis and improving active performance.

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The Journal of Portfolio Management
Vol. 30, Issue 2
Winter 2004
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Multiple Alpha Sources and Active Management
Eric H. Sorensen, Edward Qian, Robert Schoen, Ronald Hua
The Journal of Portfolio Management Jan 2004, 30 (2) 39-45; DOI: 10.3905/jpm.2004.319928

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Multiple Alpha Sources and Active Management
Eric H. Sorensen, Edward Qian, Robert Schoen, Ronald Hua
The Journal of Portfolio Management Jan 2004, 30 (2) 39-45; DOI: 10.3905/jpm.2004.319928
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