One of my mental models is that factors are just alphas that got...
sysls@systematicls
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Nov 27, 2025
~1 min read
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One of my mental models is that factors are just alphas that got too popular.
The lifecycle:
1. Someone discovers a cross-sectional relationship. Momentum works. Low-vol outperforms. Value beats glamour.
2. They trade it. It prints.
3. They publish a paper or tell their grandma about it.
4. 10,000 academics cite it. Their grandma shares it in her tea party.
5. ETF providers package it. AQR, DFA, Vanguard launch products.
6. $500B+ in AUM now harvests momentum alone.
7. The alpha compresses. What was 1.5%/month is now a crowded trade.
Imo, alphas that are a result of flows or behavioral biases don't die. They transform.
The returns compress, yes. But they persist because:
- There's still risk (momentum crashes, value traps, crowding unwinds)
- Capacity constraints mean not everyone can harvest them efficiently
- Behavioral biases that created them don't disappear
The premium isn't "free alpha" anymore. It's compensation for bearing factor risk that most investors either can't or won't hold through drawdowns.
Momentum isn't broken.
It just graduated from "edge" to "risk premium."
That's the game. Find alphas before they become factors. Or accept you're harvesting risk premia, not alpha - and size your expectations accordingly.
Somewhat controversial view, the most popular, vanilla implementation of all popular hedge fund strategies are now factors:
1. Index Rebalancing
2. Vanilla/Formulaic Statarb
3. Trend-following in Futures, etc.
The lifecycle:
1. Someone discovers a cross-sectional relationship. Momentum works. Low-vol outperforms. Value beats glamour.
2. They trade it. It prints.
3. They publish a paper or tell their grandma about it.
4. 10,000 academics cite it. Their grandma shares it in her tea party.
5. ETF providers package it. AQR, DFA, Vanguard launch products.
6. $500B+ in AUM now harvests momentum alone.
7. The alpha compresses. What was 1.5%/month is now a crowded trade.
Imo, alphas that are a result of flows or behavioral biases don't die. They transform.
The returns compress, yes. But they persist because:
- There's still risk (momentum crashes, value traps, crowding unwinds)
- Capacity constraints mean not everyone can harvest them efficiently
- Behavioral biases that created them don't disappear
The premium isn't "free alpha" anymore. It's compensation for bearing factor risk that most investors either can't or won't hold through drawdowns.
Momentum isn't broken.
It just graduated from "edge" to "risk premium."
That's the game. Find alphas before they become factors. Or accept you're harvesting risk premia, not alpha - and size your expectations accordingly.
Somewhat controversial view, the most popular, vanilla implementation of all popular hedge fund strategies are now factors:
1. Index Rebalancing
2. Vanilla/Formulaic Statarb
3. Trend-following in Futures, etc.
