An alpha signal is any quantitative feature — derived from price data, fundamentals, alternative data, or cross-asset relationships — that demonstrates persistent ability to predict future returns after controlling for known systematic risk premia such as the market, size, value, or momentum factors.
Signals are evaluated by their Information Coefficient, their decay profile, and their marginal contribution when added to an existing portfolio of signals. A signal with positive IC but high correlation to existing signals adds little incremental value.
Properties of a viable signal
- Positive IC — consistently forecasts the direction of returns above zero
- Out-of-sample persistence — survives out-of-sample testing
- Capacity — can be traded at target size without exhausting itself through market impact
- Distinctness — low correlation with existing signals in the book
Signal discovery, validation, and protection are the core activities of a quantitative research desk.