Alpha Strategy

Overbrook Alpha Strategy: Built for a Bottoms-Up, Dispersion-Driven Market
In today’s market, the central challenge for investors is no longer simply gaining equity exposure, it is generating differentiated returns in an environment increasingly shaped by passive flows and rising dispersion across securities, sectors and markets. Overbrook’s Alpha Strategy is designed specifically for this regime. It provides targeted exposure to long/short equity strategies that monetize inefficiencies through bottoms-up security selection, relative value analysis, and disciplined portfolio construction. As CIO Ryan Kanaley notes: “In a market defined by uncertainty, owning everything is no longer diversification, it’s dilution. Long/short equity offers selectivity, precision, and the ability to hedge what you don’t believe in.”

A Market Reshaped by Passive Flows

Over the past decade, equity markets have undergone a structural shift toward passive investing. Index-linked strategies now represent an estimated 50–55% of U.S. equity fund assets, up from roughly 20–25% ten years ago, and account for a growing share of daily trading activity1 .
While this has improved access and reduced costs, it has also altered how prices are formed. Securities are increasingly driven by mechanical allocation rather than fundamental assessment, particularly at the margin. Research from major institutions, including the Bank for International Settlements, shows that higher passive ownership is associated with:

  • Reduced sensitivity of prices to company-specific fundamentals

  • Increased flow- and momentum-driven trading behavior

  • Periods of compressed dispersion followed by sharper dislocations

  • A widening gap between index pricing and intrinsic value

The result is a market that appears efficient at the index level, but increasingly inefficient at the security level. This inefficiency is the source of opportunity, in our opinion.

A Regime Defined by Dispersion

This structural backdrop has been amplified by a shift in macro conditions. For most of the 2010s, zero rates, abundant liquidity, and high correlations limited dispersion across equities. Alpha was scarce, and broad market exposure dominated returns. That regime has now ended.

Today’s market is defined by higher interest rates, fragmented monetary policy, and materially lower cross-asset correlations. Dispersion across sectors, factors, and individual securities has widened significantly. As Ryan Kanaley explains: “When correlations break down and dispersion rises, the index stops being an efficient proxy for opportunity. This is precisely when long/short equity comes into its own, separating winners from losers through disciplined, bottoms-up stock selection.” In this environment, returns are increasingly driven by relative value differences between securities rather than directional market exposure.

Volatility as an Input into Return

Volatility has also shifted in function. It is no longer simply a risk factor to be minimized, but a recurring source of mispricing. As Kanaley notes: “Volatility, for the passive investor, is a test of patience. For the long/short investor, it’s a source of edge.” In a market where passive flows stabilize indices but not underlying fundamentals, volatility creates the conditions for relative value dislocations. These dislocations are then monetized through disciplined security selection and portfolio construction.

Alpha Is Becoming More Concentrated

Recent performance data underscores this shift. Hedge funds delivered their strongest returns in over a decade in 2025, with a broad-based composite returning 11.9% and topdecile outcomes approaching 30%2 . Performance was driven across equity long/short, macro, and sector-focused strategies, particularly in areas such as healthcare and technology. The key takeaway is not cyclical strength, but structural dispersion: alpha is increasingly being generated through security-level differentiation rather than market direction.

Capital Follows Dispersion

Institutional allocators are responding accordingly. Pensions, endowments, and sovereign wealth funds are increasing hedge fund allocations at the fastest pace on record, with a net 45% planning to raise exposure in 20263 . This exceeds planned allocation increases to private equity, private credit, and venture capital, all of which are seeing weaker marginal demand. Assets under management have risen to approximately $3.5 trillion, reflecting renewed inflows after more than a decade of net outflows. At the same time, trading infrastructure and financing ecosystems are expanding alongside increased demand for active strategies. But the more important shift is not capital allocation, it is return dispersion.

The Core Constraint: Access to Security-Level Alpha

While dispersion has expanded opportunity, it has also increased inequality in outcomes. Returns are highly concentrated in strategies that consistently identify mispriced securities and construct portfolios around relative value relationships. These outcomes are not driven by market direction, but by process: security selection, valuation discipline, and portfolio construction under uncertainty. The challenge for investors is access to that repeatable process. Overbrook’s Alpha Strategy is structured to provide exposure to this environment by allocating to strategies built around bottoms-up security selection and relative value positioning given fundamental dislocations in the market. The focus is not replication of market exposure, but participation in the sources of inefficiency created by dispersion and passive flows.

A Market Defined by Security Selection

The defining feature of today’s market is not volatility or direction; it is dispersion amplified by passive capital flows. Index investing has not eliminated inefficiency; it has shifted it beneath the surface of markets, where security-level differences matter more than ever. In this environment, portfolio outcomes are increasingly determined by the ability to identify relative value and construct portfolios that systematically exploit those differences. We are no longer in an “alpha winter.” We are, as one CIO described it, in the “heat of the summer.” The Overbrook Alpha Strategy is built for this regime, where returns are driven by bottomsup security selection, relative value discovery, and disciplined portfolio construction across increasingly fragmented markets.

Reach out to IR@overbrook.com with inquiries.

Disclosure:

Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. Additional information on Overbrook, its strategies and fees is available via its Form ADV available upon request.