Alpha is a measure of the excess return (positive alpha) or shortfall return (negative alpha) of an investment compared to a benchmark. It thus corresponds to the part of the return that is independent of the market return. For our calculations, we use the Jensen Alpha with a risk-free return of 0.25%. By absolute alpha we mean the combination of outperformance against a benchmark and positive return development.
Systematic trading strategies aim to detect recurring patterns and exploit them profitably. The quality and robustness of a rule-based investment strategy can be checked on the basis of historical data. This simulation of buy and sell transactions is called backtesting.
Curve fitting describes the over-adjustment of an investment strategy to the underlying data series. Individual parameters are modified in an iterative process until the one that promises "optimal" results is selected from a large number of different combinations - but only on the basis of the specific data history used for the calculation. The trading strategy delivers wonderful results in the backtest but fails in real trading.
We understand Impact Investing as an investment approach that goes beyond the mere orientation toward risk and return. Positive social and / or ecological effects should be direct, intended, and demonstrable. We are concerned with a measurable positive social and / or ecological impact. According to this definition, Impact Investing goes beyond previous ESG or SRI approaches.
A drawdown (loss in value) represents a loss between a high and the subsequent low within a certain period. The maximum drawdown is therefore the cumulative loss that could have occurred within a period if the investor had invested at the time of a high. The maximum drawdown thus represents the worst result of an investment in the period under consideration.
The Sharpe ratio describes the relationship between the return of an asset or investment strategy and the risk taken. The return equals the peformance beyond a risk-free rate, while the standard deviation is used to measure risk. Both figures are annualized.
Slippage describes the difference between the expected and actual price execution for a transaction. This is particularly important for market and stop orders in markets with low liquidity. This negative effect can be eliminated by means of limit orders.
Analogous to the Sharpe Ratio, the Sortino Ratio puts the return on an asset or investment strategy in relation to the risk taken. However, the Sortino Ratio only uses downward movements (downward volatility) for risk calculation.
Survivorship bias arises when the backtesting only takes into account the current index composition. As a result, performance is distorted upwards because unsuccessful stocks that have left the index in the past are removed from the backtest.