Strategy Decay Detection: Building a Warning System for Alpha Erosion
Knowing when to pull the plug
Imagine the following: You spend weeks working on a strategy, the backtest looks great, a Sharpe of 1.5. You decide to go live, and it slowly and quietly stops working.
Did you overfit? Or maybe it’s alpha decay?
Everyone talks about alpha decay, but no one tells you how to actually quantify it. In this article, we’ll figure out how to do so and build a warning system that tells you when it’s time to pull the plug on a strategy.
We do this by implementing Minimum Regime Performance (MRP), a framework introduced by Alexander and Fabozzi (2026) that measures how a strategy holds up across structurally distinct market regimes. We will apply this method to a universe of crypto factors.
Beyond signal monitoring, MRP is also relevant in portfolio construction. Just as you would punish strategy tail risk like Value at Risk, you can also punish strategies that have a high tendency to decay.
The article will use the factors discussed in the following article:
Knowledge of regime switching models is NOT required.
I write about quantitative trading the way it’s actually practiced:
Robust models and portfolios, combining signals and strategies, understanding the assumptions behind your models.
More broadly, I write about:
Statistical and cross-sectional arbitrage
Managing multiple strategies and signals
Risk and capital allocation
Research tooling and methodology
In-depth model assumptions and derivations
If this way of thinking resonates, you’ll probably like what I publish.