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Alpha Concentration by Sector

I recently heard a fund manager asked why he focused on the Technology sector. He replied that there was a study done showing that the alpha concentration was the highest in the Technology sector. I wanted to verify if this was true, so I conducted my own study using the Quantopian data. After looking at the data I determined that there was higher alpha in certain sectors but Technology was not the highest. Although Technology did improve for longer holding times. The second finding was that the advantage that certain sectors have appears to be relatively stationary. I hope you find these results useful.

Feedback is welcome and appreciated.

A detailed explanation of the method is included inside the notebook along with all the relevant code.

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3 responses

Interesting line of thought!

I would borrow the concept from physics ("potential energy") and call this "potential alpha." Now the pertinent question is how to release it into kinetic alpha.

Thank you for sharing interesting factors.

Total returns 2009 to 2019
Technology: 710% (8.10x)
Healthcare: 374% (4.74x)
Energy: 58% (1.58x)

It seems Healthcare sector's low volatility and high returns would have caused high alpha. Technology sector's high volatility would have caused relatively medium alpha despite of its very high returns.

Because of the Energy sector's nature of business, its volatility would be low for 10 or 20-day period and high for 200-day period due to business environment changes such as war or natural disasters. Energy sector's volatility would be affected by these events which would occur only few times per year.

Here is a link provides annual returns of each sector from 2007 to 2019

What about instead of the spread between top and bottom decile returns, measuring the spread between top and bottom decile alpha (asset_returns - market_returns * beta)?