This is… my 1,000th post! I’m having a morning of feeling quite prolific 🙂
Some exciting news: my thousandth-postday gift to the site is a face-lift, with a real live designer and everything. I’m unspeakably excited for that – RollingAlpha is about to be all grown up and legit!
As part of the design process, I’ve had to spend a lot of time thinking about the name of the blog, and what it all stands for. And I thought that I might share the name origin story with you.
Where RollingAlpha Came From: The Allan Gray Backstory
As many of you will know, I am part of the CA (SA) crowd. Part of that membership required my early years to be spent in the world of auditing – which is a mostly fun place, except for the fact that almost all of your work requires you to be an annoyance to a client.
Usually, I am not too bothered about being annoying. Speaking with my pragmatist hat on: my emotions are my problem, your emotions are your problem, and if I’m causing you to have emotions, then those are… your emotions, which are your problem. Sorry.
That said, most people being audited seem to feel that “dealing with emotions” means “ignoring the emails until it goes away” or “disdain” or “being vengeful by withholding the data that would make this all go a lot quicker.” Which in turn meant that my own emotional state mostly operated at a slow simmer of aggravation, hidden under a lid of polite diplomacy.
One big exception to this was the two months a year that I got to spend at Allan Gray. For the non-South African readers, Allan Gray is one of our big asset management houses. They’re contrarian. They’re successful. They have great offices at the V&A Waterfront in Cape Town. They have espresso machines on every floor. And most importantly, they have a flipping excellent canteen for staff lunches. Also, the finance department staff didn’t get annoyed with you asking questions – they got annoyed with you for asking stupid questions. And if your questions were foolish enough, there was every chance that a request would be made for your removal from the audit team.
Basically, Allan Gray was the audit-client equivalent of those kids that sit in the front of class, looking forward to tests and exams because they almost always get the highest mark – and they really like getting the highest mark, and they like to see that in writing. But if you mark them wrong, then you triple-check your own solution, because they’re probably right – and if you mark them wrong in error, then you best believe that they WILL BE complaining about your inadequacy as a teacher/lecturer to an HOD because, well, if you’re marking their paper, then best you know what you’re doing.
It was heaven.
And it was in an Allan Gray audit meeting that I first heard someone use the phrase “maintain our alpha”. Which was one of those in-retrospect-almost-cringeful moments where I practically exulted in knowing what they were talking about. In fact, I think I was even invited to explain it #proudmoment
And here we are. I’m about to re-enact that moment.
Talking about “Alpha”
So the official definition of “alpha” sounds something like “the extra return generated for any given level of risk”.
To explain that, let me give you an example:
- Let’s say that I play a game of coin-tossing.
- In the game, I get to flip a coin 10 times.
- If I win a toss, then I earn $3; and if I lose, then I have to pay out $2.
- Because the coin only has two sides, the odds are that I’ll win half the time, and lose the other half of the time.
- So over 10 coin tosses, I’ll expect to win five coin tosses (and earn $15) and lose the other five (and pay out $10).
- Meaning that, overall, I expect to earn $5 ($15 – $10) in the game.
- But let’s say that the Universe is in my favour, and in a particular game, I win seven coin tosses.
- I’ll receive $21 for the seven wins, pay out $6 for the three losses, and end up earning $15 overall.
- Based on the risk that I took on (the 50:50 odds), I expected to earn $5. But I actually won $15. That extra $10 – that return over and above the $5 that I expected to earn – that is positive “alpha”.
And Why Alpha Must Roll
The problem with that $10 alpha is that it might just be a lucky break in this particular game. And based on the probabilities involved: the more times I play the game, the closer I’ll get to earning $5 per game on average.
This is where the “rolling” part comes in – because if I’m a bit prescient, and I’m able to beat the odds by regularly/repeatedly winning 7 out of 10 coin tosses, then that is called “rolling alpha”.
And it’s kind of the holy grail of asset management – to generate long-term positive “rolling alpha”.
Of course, because I’m a finance nerd, I also think that positive “rolling alpha” is also the holy grail of life in general.
But perhaps that’s just me. Either way, hence cometh the name.
There is also a theory in dog-training theory where you alpha-roll a naughty pooch in order to correct bad behaviour.
That is entirely coincidental.