Factor Intensity and Alpha Intensity

Factor intensity is a measure to better predict periods when stock performance will be beta driven and linked to systematic factors. Conversely, Alpha Intensity is a measure to better predict periods when stock performance will be alpha driven and linked to idiosyncratic factors. By distinguishing between alpha oriented vs. beta oriented environments, a PM will be more appropriately equipped to deploy risk capital, by leaning into or away from certain convictions as the market rewards such behavior.

Factor Intensity: Factor intensity is best visualized through the Red Flag Indicator, which detects periods of elevated factor turbulence, helping investors proactively adjust portfolio risk exposures. The indicator is constructed by comparing daily realized factor moves to their predicted one-standard-deviation (1σ) volatility.

Methodology: Each day's realized factor return is divided by its predicted standard deviation. Example: If the Momentum factor has an expected 1σ move of 50 bps and moves exactly 50 bps, the indicator equals 1.0. A two-week half-life exponentially weighted moving average (EWMA) is applied to smooth out short-term fluctuations while maintaining responsiveness to recent changes. We aggregate the individual factor moves by taking SQRT (sum of the square of the realized factor moves normalized by their predicted volatilities). This allows us to come up with a market wide metric.

Interpretation: In simple terms, when the indicator exceeds 1.0 it means that factor returns are averaging larger-than-predicted swings (i.e. more than a 1 std deviation move). The implication is that the market is experiencing a period of heightened systematic factor risk, which is bad for stock pickers. If the indicator is below 1.0, then the factor returns are averaging smaller swings (i.e. less than a 1 std deviation move). The implication is that the market is experiencing a period of lower systematic factor risk, which is good for stock pickers.

To access Factor Intensity, go to the Analyze section of the application for a given portfolio, and select “Factor Intensity” with the associated model symbol from the drop-down. Also adjust your time frame if needed.

Note: Factor Intensity is a ‘risk-model-level' statistic and is not measured at the individual stock level.

Alpha Intensity:

The Alpha intensity indicator detects periods of elevated idiosyncratic return, helping investors proactively adjust portfolio risk exposures. The indicator is constructed by comparing daily realized idiosyncratic return movements to their one-day predicted specific risk or idiosyncratic volatility.

Methodology: A normalized measure is computed by taking the absolute value of the 1-day alpha return and dividing it by the one-day predicted specific risk. The one-day specific risk is equal to SQRT(Security Total Risk^2 * Security Specific Risk%)/SQRT(252). For each security, we then calculate the EWMA of the Normalized Return based on a 10-Day half-life. This EWMA approach allows us to integrate prior days into the measurement and see whether there's a trend in the Normalized Return exceeding a 1 std deviation predicted move.

Interpretation: In simple terms, when the indicator exceeds 1.0 it means that idiosyncratic returns are averaging larger-than-predicted swings (i.e. more than a 1 std deviation move). The implication is that the market is experiencing a period of heightened stock specific risk which is good for stock pickers. These environments may correspond with specific catalysts like earnings, product releases, M&A announcements, etc. During periods where the indicator exceeds 1.0, PM’s may benefit from leaning deeper into high conviction names. Conversely, when the indicator is below 1.0, the market is experiencing a period of low idiosyncratic returns. In this environment, a PM may wish to lean less into conviction and more into core or passive style exposures.

To access Alpha Intensity, go to the Analyze > Trends section of the application, and under the drop-down select “Alpha Intensity”. Make sure the risk model chosen in the top right hand corner matches with the one in the content set name.

While Alpha Intensity can be useful to examine at the portfolio level, it can be misleading on long/short portfolios because of the netting effect between positive and negative values. Therefore this metric is much more useful when examined at the security-level in long/short portfolios.

To access unweighted security-level Alpha Intensity scores, click on the double arrow icon in the top right hand corner:

You can further click on any individual stock from this table to see a time series of its trailing 5D cumulative alpha and its Alpha Intensity.

When Alpha Intensity is increasing but trailing 5D cumulative alpha is negative, it can indicate that you are positioned contrarian to the market and participants are moving the stock in the opposite direction.