Importing Investment Value-Added: Alpha Transport
Jul 17th, 2006 | Filed under: Portable Alpha & Alpha/Beta SeparationBy: Stephen Foote, Jean Michel, Mercer Investment Consulting
Published: October 15, 2004
Excerpts:
“Pension and other institutional investment portfolios are typically constructed to generate returns from a combination of two factors: manager skill and the market.”
“…through the use of derivative instruments (such as futures and swaps) it is possible to earn the alpha that has been generated by a skilled manager without increasing exposure to the particular market in which the manager is investing. The process of combining manager skill (i.e., alpha) with the desired strategic asset allocation (i.e., beta) is referred to as Alpha Transport.”
“Alpha Transport is not a new concept. In fact, the underlying techniques have been used by investors for a number of years. These techniques can fundamentally alter the way in which an overall portfolio is designed. In particular, a total portfolio of diversified alpha strategies can be constructed, drawing on strategies from the most attractive markets rather than being limited to markets comprising the portfolio’s strategic asset allocation.
“A portfolio with an Alpha Transport approach should not result in a combined strategic risk (beta) and manager risk (alpha) that is materially different from a traditional approach. However, the implementation of the structure does introduce unique risks. If these risks are understood and effectively managed, an Alpha Transport strategy could provide a more efficient overall portfolio than a traditional approach to portfolio construction.”
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