  We propose a framework for constructing factor models for alpha streams. Our
motivation is threefold. 1) When the number of alphas is large, the sample
covariance matrix is singular. 2) Its out-of-sample stability is challenging.
3) Optimization of investment allocation into alpha streams can be tractable
for a factor model alpha covariance matrix. We discuss various risk factors for
alphas such as: style risk factors; cluster risk factors based on alpha
taxonomy; principal components; and also using the underlying tradables
(stocks) as alpha risk factors, for which computing the factor loadings and
factor covariance matrices does not involve any correlations with alphas, and
their number is much larger than that of the relevant principal components. We
draw insight from stock factor models, but also point out substantial
differences.
