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The Behavioral Alpha Score is the highest-level output of Essentia’s Behavioral Alpha Benchmark methodology: a comprehensive measure of investor decision-making skill derived from daily holdings data. It reflects seven key types of decision-making: stock picking, entry timing, sizing, scaling in, size adjusting, scaling out and exit timing.
The Benchmark methodology, as detailed in a research paper published in the Journal of Investing, assesses whether an investor’s decisions have added value more than 50% of the time (their decision hit rate) and if their average right decision has been more right than their average wrong decision has been wrong (their decision payoff ratio).
No — people often assume that, but it’s not the case. Our clients are typically investors, rather than traders — many with very long-term investment horizons. We work with portfolios with any concentration level and turnover frequency. Because our analytics are flexible, they can be calibrated to reflect the uniqueness of your investment strategy and the time frame you are using to measure success.
Essentia Insight is used by active public equity portfolio managers (and managers of ETF portfolios) — fundamental and quant, long-only and long-short — worldwide.
Insight currently handles equity and equity-like instruments (ETFs, CFDs with an equity underlying). We’re in the process of adding analysis of other instruments — if you’re interested in helping us prioritize which come first, let us know.
Essentia Insight uses a minimum of three years of historical daily holdings data as its starting point for analysis, then a daily feed thereafter. Managers typically source the data from their custodian or fund administrator, or from their order management or portfolio management system. Essentia provides a data template and facilitates the process, coordinating with third parties as necessary. We have worked with most major vendors already.
Regardless of the source, Essentia’s data onboarding team has a tried-and-tested process for making the data upload process easy, and all data is handled with attention to privacy and under certified SOC 2 and ISO 27001 security standards.
At the Insight Basic and Pro levels, the owner of the data (typically the manager, but where segregated accounts are in use, the allocator) stays in control of who can see the identity of the portfolio at any given time by granting or revoking permission. That is also the case at the Advantage level, but more advanced permissions make it possible to ensure that nudge responses (for example) are only seen by specific users.
By default, all portfolios with a Behavioral Alpha Score above 50 will be identifiable, and all of those with a score below 50 will not. The owner of the data can switch that setting at any time.
As soon as the score drops below 50, the portfolio’s identity becomes hidden. It is worth pointing out, however, that Behavioral Alpha Scores do not tend to swing dramatically from quarter to quarter unless the manager makes a deliberate change to their process. In fact, our latest research shows that Behavioral Alpha Scores tend to persist over time, which makes them especially valuable to anyone trying to assess whether a manager is likely to deliver on performance.