“Apples to apples” is one of the most crucial yet frequently misunderstood concepts in investment management. Over the years, the industry has seen numerous strategies—such as smart beta—claim they can outperform standard benchmarks like the S&P 500. Yet even with more than six trillion dollars in smart beta assets, the struggle to generate consistent alpha continues. The factors these strategies rely upon often come into favor, then fade, casting doubt on the persistence of their outperformance. In our view at AlphaBlock, the only way to truly evaluate a strategy’s merit is by making a fair comparison—what we call an apples-to-apples approach.
Traditional finance theory, rooted in the Efficient Market Hypothesis (EMH), suggests that consistently beating a broad market index over time is nearly impossible once you adjust for risk (beta). According to EMH proponents, when a strategy does outperform, it is typically short-lived because any edge is quickly arbitraged away. But the concept of “apples to apples” is commonly misunderstood. It isn’t about merely selecting “similar stocks” or “similar factors.” Rather, it means using the same universe of securities, ensuring similar risk characteristics, and keeping turnover and tracking error low. Only when these conditions are maintained can you claim a fair, like-for-like comparison. If you can outperform under those constraints, you’ve demonstrated real alpha rather than simply benefiting from factor tilts or lucky sector bets.
Smart beta strategies aimed to refine factor exposures—value, momentum, quality, low volatility, and more—hoping to generate systematic outperformance. However, years later, the industry is still grappling with inconsistent alpha. Factor-based performance tends to come and go, and once risk is adjusted relative to a benchmark, alpha often vanishes. Many smart beta funds also drift significantly from their benchmarks, making it difficult to argue they are truly apples-to-apples. At AlphaBlock, our approach is different: we want to replicate the S&P 500 (or any chosen benchmark) with the same universe of stocks and a comparable risk profile. Within that framework, we employ dynamic, systematic rebalancing to fine-tune factor exposures, keep turnover low, and uphold minimal tracking error. If this “clone” of the benchmark can regularly outperform its original index, then it is a legitimate challenge to the efficient market hypothesis.
We take our strategy a step further by pairing our custom, low-tracking-error portfolio with short positions in the market (via corresponding SPDR ETFs). Doing so aims to create an absolute return profile that is market-neutral. If our long portfolio closely matches the benchmark but is constructed to outperform through intelligent rebalancing, then shorting the corresponding SPDR cancels out most of the beta, leaving us with potential “pure alpha.” This is especially appealing to investors who want to hedge broader market movements and focus on strategies that can deliver consistent returns regardless of whether the market goes up or down. Naturally, this level of performance is often considered the holy grail: having a market-neutral approach that reliably produces strong absolute returns over time.
Long U.S Energy, Short XLE
To illustrate how apples-to-apples can work beyond the S&P 500, consider the XLE SPDR, which holds around 23 energy-sector stocks. Our approach would be to build a custom E&R U.S. Energy portfolio with the exact same 23 components. We then optimize the weightings, maintain low turnover, and ensure similar volatility and drawdowns so that the portfolio’s risk profile remains close to XLE. By shorting the XLE ETF while going long our carefully managed E&R Energy portfolio, we aim to remove overall market risk. If our dynamic factor adjustments and rebalancing allow us to outperform XLE, the difference becomes alpha—an absolute return uncorrelated with broad market swings.
Long U.S Utilities, Short XLU
Long U.S Industrial, Short XLI
Long Canada 60, Short TSX 60
Despite how attractive perpetual long-short (LS) solutions may sound, the industry lacks widespread offerings of this nature. One reason is winner’s bias, where strategies prefer to cherry-pick presumed winners instead of replicating the entire market universe. Another is the operational complexity: shorting an ETF perpetually while dynamically managing factor exposures requires robust modeling, data analysis, and execution capabilities. On top of that, demonstrating the credibility of such strategies can be difficult. Investors often want to see lengthy track records or large amounts of capital under management, whereas a smaller fund can still prove its capability through low drawdowns and stable returns.
Our vision at AlphaBlock is to roll out LS apples-to-apples solutions for different benchmarks and asset classes, including commodities and fixed income. We believe that if the strategy works in the U.S. equity market—whether for the S&P 500 as a whole or a specific sector like energy—it can be extended to other sectors, regions, and eventually to entirely different asset classes. By maintaining the core risk profile of each benchmark and shorting the corresponding ETF, we seek to deliver consistent absolute returns. This approach to market neutrality and alpha generation could reshape how investors measure outperformance, since it sidesteps the typical traps of high-tracking-error, high-turnover strategies.
We have already started building long-short strategies against select SPDRs. Each of these strategies begins by effectively cloning the ETF’s holdings—matching the same universe of stocks but optimizing the weightings through statistical models. We then dynamically rebalance to capture factor signals without straying far from the original risk profile. Shorting the matching SPDR helps us eliminate market beta, leaving only alpha to be measured and enjoyed. If we consistently succeed, this performance will challenge many deeply held beliefs about EMH and the limits of outperformance.
Ultimately, we’re not just talking about beating the market at AlphaBlock; we’re doing it in a way that meets the most rigorous definition of fairness—apples to apples. Our aim is to demonstrate, over the long term, that it is indeed possible to build a better version of a benchmark and outperform it without relying on excessive risk or turnover. That is the essence of genuine alpha. As we expand our strategies to include more SPDRs and other major ETFs, we hope to offer a full suite of benchmark-focused, long-short products, each carefully engineered to provide reliable, absolute returns with limited drawdowns.
In a world full of fleeting factor returns and unpredictable performance, our LS apples-to-apples philosophy stands out as a credible pathway to consistent outperformance. We invite investors, family offices, and institutional partners to join us on this journey. By rigorously adhering to an apples-to-apples framework and shorting the market against our own portfolios, we believe we can deliver the kind of alpha that once seemed unattainable—potentially redefining what it means to succeed in today’s markets.
Disclaimer: Nothing in this post is intended as investment advice or a recommendation to buy or sell any asset. Always consult a financial professional and conduct your own due diligence before making any investment decisions.