From Market Folly:
We're compiling more articles on the timeless educational aspects of investing and thought this was worth highlighting. The three sources of alpha is a concept explained in a paper by Russell Fuller of the asset management firm, Fuller & Thaler.You can also find Alpha in New Jersey (Warren Co. not Alpine)
In an old interview with Morningstar, Pat Dorsey of Sanibel Captiva Trust talked about the three sources of alpha and provides a brief overview.
1. Informational: "Knowing more than the other guy" (legally, of course) can provide quite an advantage. He references small caps where sell side coverage is scarce as a prime example. In the digital age of quickly disseminated information, these advantages are harder to come by outside of lesser known companies.
2. Analytical: This is the quantitative side of things and comes down to modeling out scenarios and the various conclusions drawn. Over time, these advantages can dissipate as others copy models etc....MORE