I speak with a lot of smart, successful people who’ve never hired a financial advisor because they believe they’re good at investing.
But when we walk through their portfolio, a pattern shows up every time:
- They can’t tell me their after-tax annualized return
- They don’t know how much risk they’re actually taking
- They’ve never done performance attribution (or don’t even know what that means)
Most people understand the first building block of investment returns: market risk premia (beta).
That’s why index funds are such powerful tools. Cheap. Diversified. Efficient.
I’m coming to find out that most people don’t understand the second building block of returns:
alternative risk premia — also called style premia, alternative beta, or exotic beta.
These are:
- Publicly known
- Systematic
- Often long/short
- And have positive expected returns over time
They’re not secret. They’re not magic. They’re just a liiiitle more complicated.
Why attribution matters
When we run a proper attribution (typically via multiple linear regression), we can decompose returns into:
- Market exposure
- Style exposures
- True alpha (what remains after accounting for known premia)
Even legendary investors don’t always look the way people expect once attribution is done.
Take Soros’ Quantum Fund, for example.
After adjusting for known premia, the residual “alpha” was actually negative during certain periods — meaning deviations from systematic exposures detracted from returns.
I was taught this in school and assumed more people already knew it.
But outside the industry, many very smart people have never seen investing framed this way.
This is exactly why my firm is called Quantitative Financial Strategies.
Investing is hard. Outcomes are uncertain. Emotions are unavoidable.
So we lean on:
- Math
- Data
- Academic research
- And disciplined portfolio construction
That doesn’t mean the ride will be easy — it won’t.
But we’ve tilted the odds of success in our favor, which is all we can do.