I'm taking a course 'AI for trading' in udacity, and there is a part I really want to make sure. The lecture keeps teaching me that there are alpha factors (driver of return) and risk factors (driver of variance) and it also says that alpha factors can turn into risk factors. I've heard that there is a joke between quant 'Your alpha factors are my risk factors'
As I study more about factors, it seems that there is no difference between alpha factors and risk factors. Because, by taking risk factors, I mean by making ourselves exposed to those certain risks, we are getting risk premium which is 'alpha' itself. It seems that risk factor and alpha factor are like 2 sides of a coin. It can be flipped anytime. Momentum, Value, Quality factors which were thought to be alpha factors are labeled as 'risk factor' by BARRA.
I cannot understand why they keep distinguishing alpha factors from risk factors. However, it seems that what I'm confused about now also made other people confused in the past. I read the paper 'Do risk factors eat alpha factors?' by JH Lee and D Stefek in The Journal of Portfolio Management, Summer 2008 and it discussed the potential problem we can get when we use similar factor both as alpha factor and risk factor. And the problem was called 'Factor Alignment Problem (FAP)' there. Is this a problem which should be dealt seriously when we try to divide factor into alpha and risk factors?
How does this all procedure work in real world? I wonder if quants even really use the concept 'alpha factors' or they just think the only factor is 'risk factor'. Moreover, do they concern about 'Factor Alignment Problem'?
As an undergraduate student from Korea, sorry if my grammar is bad and hard to read. But I really want to make it clear. Thank you