In active asset management industry, a common approach to Test whether my Strategy Provides significant alpha is to Regress Portfolio Returns on Fama French 3 (or 5 factors) and check whether the alpha is significant.

I Developed a Strategy for cryptos wirh significant alpha at the 5% level when regressed on Fama French 3 factor loadings, i am just wondering is that test 'fair'? Can i keep the results or am i supposed to test it against some 'cryptro factors'? There arent many which are as established as the Fama French ones, on the other hand i definetely need some statistical validation as it is for some scientific paper. The same problem of course arises for all other asset classes such as bonds too.

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    $\begingroup$ You can think of Fama French as a 'survival test': it kills off (eliminates) any strategy that can easily be explained by well known factors that affect stock returns. If your strategy survives this test it means it offers something original which is not just a rehash of simple stock investing. So that is good, your strategy passed the test. You have something interesting to offer to people already invested in simple stock strategies. That's how I would phrase your conclusion. $\endgroup$
    – nbbo2
    Mar 27, 2020 at 11:03
  • $\begingroup$ How did you calculate factor exposure to the FF factors for crypto? $\endgroup$
    – Bob Jansen
    Mar 21, 2021 at 20:14

2 Answers 2


These days the correlation between crypto and the financial market is approximating 1 anyway so you should be fine I think.


The alpha you got makes absolutely sense but compared to the Fama French market, i.e. stock market. It does not take into consideration the characteristics of the crypto market (return, variance, skew, etc.). Therefore, I would build another fair value model based on crypto market.

  • $\begingroup$ How would you do that? I thank there hasnt been much (academic) Research regarding crypto factors. So I might want to test the model against the simple crypto market Portfolio at least. Could I use the top 100 cryptos weighted by their market cap as a Proxy for the crypto market and than Regress my Portfolio Returns on the market? $\endgroup$
    – MANGo 92
    Jul 1, 2019 at 12:08
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    $\begingroup$ Yes, makes sense as long as you believe that universe represents the market/systematic risk and is investable (i.e. liquid enough and does not require any extra ability of a manager). However, from my limited understanding of crypto market, it may be the case that the single currencies correlate heavily to BTC, thus I would suggest to consider mean-variance optimized weights instead of market ones (so to consider correlations to BTC) $\endgroup$
    – Vitomir
    Jul 1, 2019 at 12:37
  • $\begingroup$ "I thank there hasnt been much (academic) Research regarding crypto factors" - do you need any? Just take standard factors such as momentum or carry. These are not specific to stocks and could be applied to crypto. $\endgroup$
    – user42108
    Nov 16, 2021 at 17:16

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