Alpha Stream

An alpha stream is a collection of independent signals combined into a single expected return forecast. The goal is to reduce dependence on any one idea and to stabilize performance through diversification.

Why Combine Signals

Single signals can be fragile and regime dependent. Combining signals smooths returns and reduces drawdowns when one signal underperforms. It also lowers model risk by spreading exposure across different sources of alpha.

Combination Methods

Common methods include equal weighting, risk parity weighting, or weighting by historical information coefficient. Correlation constraints help prevent highly similar signals from dominating the combined stream. Some systems adapt weights based on recent performance while imposing stability limits.

Portfolio Integration

Alpha streams typically feed a portfolio optimizer or ranking engine. The combined output should align with liquidity constraints, risk limits, and turnover targets. Execution quality matters because multiple signals can increase trading activity.

Maintenance and Governance

Signals should be monitored for decay, correlation drift, and changes in cost sensitivity. Weak or redundant signals are retired and replaced through a controlled research process. Clear governance prevents ad hoc changes that can destabilize performance.

Conclusion

Well managed alpha streams are more resilient than single signal strategies. They provide a stable foundation for systematic trading across market regimes.