Apple Picking and Finding Alpha

Investment Education

Apple picking in the fall is a requirement for all families with little kids in the Northeastern U.S. Or at least that is my understanding. My family fulfilled our annual duties last weekend, driving to upstate New York for the time honored tradition. On the way to the farm, visions of a beautiful day spent galavanting among lush apple trees, filling our (for some reason wooden) baskets to the brim with fresh, perfect apples, filled my head.

But apple picking is not like that - not when you live in the (ironically named) Big Apple: New York City. To give some background, I’m a financial researcher, working on systematic strategies. One of the goals in my job is to engage in quantitative alpha research: building models to detect stocks that are mispriced, and thus “ripe for the picking”. Alpha is the holy grail of asset management: it’s return over and above the risk you are taking. It’s the unique return that cannot be explained by anything other than that you are smart, good at your job, and have found something in the market that nobody else has. 

I am not the first person to search for alpha. The notion of systematically recoverable “alpha” in financial markets has been around for a few decades, and given the riches that lay in store for those that find it, has attracted a lot of talent. In the early days of alpha research (I started 16 years ago, but even before that), the field was still young, and the alpha trees were full. Many people got rich trading what are now relatively well-known effects, especially in quantitative investing: value, momentum, carry, and trend. It’s too simplistic to say those people had it easy: they were the ones that even thought to do this in the first place, and they deserve the rewards of that discovery. But having discovered the orchard, the apples were plentiful and not hard to grab. 

That was my dream apple picking trip. But, just like searching for alpha, I was not the only person from New York City that decided to go apple picking that beautiful October day.

First, you can dream about the perfect day for a long while: the closest farms to New York City are an hour and a half to two hours away. And the journey ends by waiting in a 15-20 minute long line of cars to enter the farm. My car was in park for much of the wait. Once you finally get in, the farm is packed, and there are long lines for (subpar) food. More saliently, as you walk out into the apple orchard (almost three hours since you left your house), you annoyingly notice that every SINGLE apple at eye level has been picked.  

There is no more low hanging fruit,” you think. It’s fun to see the literal instantiation of a popular saying. You are suddenly cognizant to not let one bad apple ruin the bunch, and to be aware of exactly how far apples fall from the tree...but, all apple expressions aside, the lack of low hanging fruit is the most pressing issue. To get any good apples you have to climb the tree. And the more you are willing to climb, the better the apples are. The people willing to climb 15-20 feet into the tree had their pick of beautiful, perfect apples, but it was a lot of work. At 8 feet, the apples were good, but less good. The orchard was deceptive: rows of trees that had low hanging apples existed, but it was for a reason. Upon further inspection, those particular apples were good for decoration, but apparently not for, say, “eating”. 

In other words, the orchard was efficient. You could get good apples, but you had to work for them, and your bounty was in direct proportion to your effort. Collaboration was key: parent/child teams tended to work well, with the child willing to do the climbing, and the parent willing to spot and provide a height boost if needed. My son and I picked a bunch of great apples this way.  

Apple picking

Searching for alpha

Alpha research in 2019 is like apple picking outside of New York City in October. The orchard is already discovered. It’s very crowded - the easy apples have all been picked. Filling your basket with apples doesn’t depend so much on flashes of genius, but rather the willingness to put in the effort, look up at a 20 foot tall tree and say “I’m going to climb that.” Or more like “we’re going to climb that”, because if you try to do it yourself, you’ll lose out to others that have found ways to collaborate. Finding ways to scale your organization, er, family, in a way that puts you in the position to pick those apples, to find that alpha. And then even when you have it, savor those bites, because it may not last long. Apples rot in a week or so. Alpha decays over time as others discover it, and when it does, you’re back in your car, driving upstate for two hours, dreaming of the perfect apple.


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