In our book
The Incredible Shrinking Alpha, Andrew Berkin and I provided the evidence demonstrating that it is persistently more difficult for active managers to add alpha (outperform appropriate risk-adjusted benchmarks). We also demonstrated that there are four main themes that explain the shrinking alpha:
- Academic research has been converting what was once alpha into beta.
- The pool of victims that can be exploited has been shrinking.
- The competition has been getting tougher.
- The supply of dollars chasing the shrinking pool of alpha has increased.
The latest research on the impact of social media provides us with yet another explanation: Social media provides analysts with information that reduces their forecasting errors — another example of the benefits of the wisdom of crowds (at least when they act independently, not in herds). The result is that the ability to generate alpha continues to be under assault — trying to outperform the market by stock selection is becoming even more of a loser’s game.
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