Pure Alpha Framework

The Pure Alpha framework addresses a fundamental question in investment management: how do you distinguish genuine manager skill from stylistic tailwinds?

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Core Idea

Most active manager evaluation frameworks confuse performance with skill. A manager may outperform because they have genuine insight — or simply because their style (value, growth, small-cap, etc.) happened to be in favor. The Pure Alpha framework separates these two sources of return through systematic holding-based analysis.

By decomposing a manager's portfolio into its underlying factor exposures and comparing actual returns against the returns implied by those exposures, Pure Alpha isolates the component of return that comes from active decisions independent of style bias.

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Publications

• Pure Alpha: Evaluating Active Management (January 2022) — Introduces the framework and demonstrates its application across a universe of active equity managers.
• Pure Alpha II: A Framework for Active Manager Evaluation (February 2023) — Extends the framework with additional analytical dimensions and case studies.

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Methodology

The framework operates in four steps:

1. Holdings-based factor decomposition — Map every position to its factor exposures
2. Return attribution — Calculate the return explained by factor exposures versus active bets
3. Consistency analysis — Evaluate whether active returns are persistent or episodic
4. Skill assessment — Distinguish genuine stock-picking skill from factor timing or style drift

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Applications

The Pure Alpha framework has applications for:

• Institutional consultant-grade manager due diligence
• Fund-of-funds manager selection and monitoring
• Internal assessment of active management programs
• Portfolio construction — identifying managers who provide genuine diversification through independent alpha sources

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Tier 2 — Published research articles