Alpha Decay


Alpha Decay is a term used to describe the loss in the predictive power of an alpha model over time. Alpha is a metric used to determine an algorithm's ability to beat the market, hence making ScaleTrade's algorithm an alpha model.

Main Cause

The main cause of alpha decay is an increase in competition. As more traders move towards a specific strategy, competition for profits increases which often leads to lower returns (alpha) for the initial traders. Based on the current popularity of the market, and the rise in retail investors, alpha decay is becoming a much more prevalent issue for systematic traders using basic trading algorithms.

Preventing Alpha Decay

ScaleTrade's algorithm aims to prevent alpha decay using a variety of tools and tactics. The main edge is that all research performed at ScaleTrade is done in-house with no outside sourcing or purchasing of alpha. This means that any edge used by ScaleTrade is first discovered by our team and not by a third-party source.
We also aim to continue releasing improvements and alterations to the algorithm as time continues. This will always keep pushing new methods and logic into the algorithm, making sure it keeps up with the efficiency of the market. By constantly updating the algorithm's logic, we aim to always outpace any decay that may arise from a stale strategy.
Finally, we aim to prevent alpha decay through the complexity of our models and techniques used to generate signals. Our algorithm uses a complex array of techniques and checks used to generate a signal for entry or exit, making the chances of someone using an exact or similar strategy to ours very minimal. This coupled with our ever-evolving logic allows us to remain ahead of the alpha decay curve.
By keeping ahead of alpha decay, and by close and active monitoring of the ScaleTrade algorithm's performance, our team aims to keep our algorithm generating returns long into the foreseeable future.