Demystifying the Concept of (Portable) Alpha
Jul 26th, 2006 | Filed under: Portable Alpha & Alpha/Beta SeparationBy: Deborah Hazell & Orlena Yee, Fischer Francis, Trees & Watts
Published: October 2004
Excerpt:
“Whereas ‘alpha’ is the excess return generated above a given benchmark, the term portable alpha refers to the excess return generated independently from any given benchmark. It results from the separation of the alpha generating process from the beta construction process. Historically, investments have typically been structured within an asset allocation framework, and investors have sought to replicate and enhance the benchmark returns within their sector of the aggregate framework. This has traditionally been undertaken through optimally managing the benchmark and creating overweight or underweight positions relative to the benchmark that are expected to generate positive returns above the benchmark return.”
“The concept of portable alpha completely separates the alpha and beta management, to the point that the manager of the alpha may not be the manager of the beta. Furthermore, the beta construct may have no similarities in terms of instruments or parameters relative to the alpha generating component, and indeed there may be no correlation between these two different paths of return.”
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