[Dropping some actual alpha]

Alpha construction:

Generally I define alpha with a 2×2 matrix. You have 2 categoricals. Formulaic vs Logical. Directional (sometimes called tactical) vs XS.

Formulaic alphas should deal with often generated features, and logical alphas should deal with extreme signals.

Formulaic alphas are basically just features, and to generate a feature you need a meaningful value to happen often. Whereas logical alphas are just IF, AND, BUT, etc. These often deal with extremes because you can have an underlying formula but only trade extreme z-score values, whereas a feature you will always produce a forecast from it. Define whether extreme values capture all the edge or not, this is important.

Directional just means can be 100% long to 100% short. XS means you try within your best attempts to be net flat. This can be dollar neutral (equal sells to buys) or market neutral (beta hedged).

Generally any logical alpha will be directional because your events are sparse so there is only alpha to be lost by trying to force it to take an offsetting position. The exception to this is pairs trading where we are defining positions logically but trading cross sectionally.

For formulaic alphas the choice of cross sectional vs directional is simply an optimizer setting and both are very valid. Cross sectional isolates the alpha better but directional is better on turnover as you have less of a requirement to trade.