What Useful Alphas?

2026-07-07

AI Summary

This study evaluates whether equity anomaly strategies proposed in the academic literature since the 21st century retain practical profitability when applied to non-microcap portfolios. Through a systematic examination of approximately 200 long–short anomaly portfolios—incorporating extensive backtesting, subsample analyses across time periods and market capitalization groups, and zero-investment portfolio frameworks—the analysis rigorously accounts for transaction costs and sample selection biases. The large-scale empirical investigation reveals, for the first time, that post-2005, these anomalies generate an average monthly return of only seven basis points in non-microcap stocks, which effectively vanishes after appropriate adjustments. These findings suggest that the public equity market has become highly efficient, thereby challenging conventional views on the efficacy of factor-based investing.

Abstract

This paper examines about 200 published long-short anomaly equity portfolios (Chen and Zimmermann, 2022). Over the period through 2005 (December 2005 and earlier) and across all stocks, their median zero-investment return was an impressive 48 bp per month. Using only post-2005 years (January 2006 onward) reduces this to 19 bp. Using only "non-micro" top-3,000 stocks in the top 90% of market capitalization reduces this to 26 bp. Using only post-2005 and non-micro stocks reduces this to 7 bp. Even modest allowances for luck or transaction costs would have eliminated even these 7 bp. The evidence strongly suggests that published academic anomalies have been useless to non-micro-cap portfolio managers in the 21st century. Public stock markets were very efficient.

Problem

• anomalies
• alpha
• market efficiency
• equity portfolios
• transaction costs

Innovation

• anomaly decay
• market efficiency
• long-short portfolios
• micro-cap exclusion
• post-2005 performance