An Introduction to Portable Alpha
Jul 21st, 2006 | Filed under: Portable Alpha & Alpha/Beta SeparationBy: Cory Custer, SEI Investments
Published: November 17, 2005
Excerpt:
“Most investors tend to acquire alpha from the same market segment or asset class where they get their beta. As an example, imagine an investor has determined the need to allocate 40% of the portfolio to the US large cap stock market. After making this determination, the investor, usually with the aid of professional advice, hires a US large cap manager, or group of managers responsible for that portion of the portfolio. Once the manager is hired and fully invested, the investor’s return expectation is all of the return of the US large cap stock market (the beta), plus some excess return above the market (the alpha). To accomplish both objectives simultaneously, the manager maintains a portfolio of stocks diversified enough to perform in line with the US stock market while underweighting and overweighting stocks that are expected to underperform or outperform respectively. In other words, the alpha and beta comes from the same place – in this case, US large capitalization stocks.
“By shopping for alpha where they get their beta, managers are limiting their opportunity.”
