The reduction in an investment’s alpha over time due to market efficiency.
Description
Alpha decay refers to the diminishing excess returns (alpha) of an investment strategy as markets become more efficient or competitors adopt similar approaches, monitored by family offices in active management. It impacts hedge funds or proprietary strategies, requiring constant innovation to sustain outperformance. Wealth managers assess alpha decay to adjust allocations or select managers with adaptive strategies. It’s a critical consideration for long-term alpha generation.
