How to know if an emerging manager has the skill to find alpha?

That is the big question that all allocators and fund selectors would like to know the answer to — who has skill and who doesn't have skill.

At Noviscient, we tend to focus on higher frequency trading strategies. So what we call “mid frequency.” They might be trading hourly, daily, weekly, but they're not trading once a quarter. This ensures that we have sufficient data.

What we can then do with this return data is to attribute returns to market or factor exposure to interest rates and the time value of money. 

If a residual persistent excess return is identified, that's alpha for us. As long as that is persistent, then we can start to invest on the basis of that.

This is our data driven way to identify alpha. 

Conversely, you can also do it by trying to understand the pedigree of this person, “what's their background? Where do they come from?” That may or may not work. That's harder for us to interpret accurately.

So we tend to stick to data driven.

It is time for change.