One day around 1300 BCE, some bored Phoenician farmers came up with the first letter of their alphabet – alep – basing it on their word for “ox", the animal they depended on to do all the heavy pulling. Filter that through Hebrew, ancient Greek and Latin, and you eventually get to the modern term alpha.
Fast-forward to the 21st century, and we have the all-too familiar concept of financial alpha — essentially, the 'excess' return you get on an investment over and above that of its benchmark. But in a world where generating financial alpha alone may not be enough to keep the doors open, asset managers need to be looking to operations to maximize profit-making opportunities.
The term "operational alpha" is less widespread, but it's picked up steam in recent years. Northern Trust has described it as the positive impact of “data aggregation, historical analysis, custom tagging functionality, and on-demand or real-time data retrieval" on investment strategy and operations.
Simply put, it's a way of thinking about culling out inefficiencies in your operational processes to minimize resource leakage and maximize the power of your technology. And it's an especially important mindset in the current environment. With regulatory demands rising, fees being squeezed, and trading itself become increasingly complex, hedge funds are being asked to pull like oxen – while looking like racehorses.
It all goes back to some of the areas of concern I wrote about when this blog was starting out:
The Alpha Wolf
In a sense, operational alpha seeks to extract “hidden" or “extra" financial alpha from operations. The concept lies at the core of what we do: permanently replace weeks of effort with the click of a mouse. If a firm can successfully generate both financial and operational alpha, it's that much closer to becoming, well, the alpha wolf of the pack.
Of course, defining operational alpha inevitably begs the question of how to actually measure it. We'll be diving into that in a few weeks; stay tuned, and subscribe for updates.