Covey
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Covey

A New Way to Reward Investment Talent

Primer on the Alpha Algo

Covey is building communities of the best investors. Anyone can join our communities, some communities help you find jobs, other communities help you learn about investing, and our newest (AC1) gets you paid for your ideas.

Alpha Capture One (AC1), pays out rewards of $8k each month to the best investors in the community based on the Alpha Algo. AC1 collects user ideas, packages them, anonymizes them, and sells them to large investment funds sharing the rewards back with the community.

Defining the Best

The Alpha Algo determines the best investors as those in the top percentile of a community. To find them, we look at multiple metrics and score each member based on where they sit on the normal distribution of that given metric. For instance, imagine the below chart is distribution of members based on the % of ideas that are profitable, we would assign the top 1% a score of 3, and the average a score of 0, then the bottom 1% a score of -3. (a.k.a z-scores from that stats course you took way back)

Building Incentives to Uncover the Best

We have found that scoring on normal distributions favors the outstanding performers that build value for the community. The next step would be to choose a metric to score analysts on, but why settle on one when we have multiple goals. We are trying to create the most valuable community of ideas, to do that we need:

More members, generating more ideas, that perform well

The Alpha Algo must drive ☝️ behavior.

More Members (Participation)

The community will increase in value with more members that have diverse backgrounds. The longer a member’s track record, the more trustworthy (i.e. valuable) the new idea data is to buyers, active participation is crucial. Joining early and inviting others will increase your participation score.

Generating More Ideas (Idea Quality)

First, to participate each month a member must contribute at least one trade idea. Beyond one idea, the more ideas we have in AC1, the more value we can offer to funds buying the data. The Alpha Algo favors more ideas per user, at the same time it also balances the quantity of ideas with the quality of those ideas. We think about quality in terms of position hit rate (# of profitable ideas in the month / total ideas) and position slugging (profits on winners / losses on losers in the month). Each member has to determine if adding an idea will positively impact their idea quality. It also means, the Alpha Algo will penalize those who have done well and decide to close all positions hoping to let it ride into month end.

That Perform Well (Performance)

Of course the Alpha Algo must consider overall performance. We look at the total return and volatility of a member. The goal is to generate higher return while at the same time not allowing volatility to creep too high.

The Result

AC1 community incentives, through our Alpha Algo, are our best attempt at creating incentives that build a community of the best investors. We want both short term rewards (monthly) and long term stock pickers. Favoring participation, idea quality, and performance will drive members to think long term while being rewarded short term.

We ask that you judge us based on our actions on covey.io/ac1. Key metrics, the Alpha Algo, and the corresponding estimated rewards are updated daily at 5pm EST.

Reach out to info@covey.io for feedback.

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