Portable Alpha: Hedge fund index based Alpha Overlay as the Most Appropriate Solution?
Aug 2nd, 2006 | Filed under: Portable Alpha & Alpha/Beta SeparationBy: Werner Goricki, Dirk Soehnholz, Marcus Storr & Vincent Weber, Feri Institutional Advisors
Published: February 24, 2006
Excerpts:
“In Europe, Portable Alpha is a recently popular and widely discussed concept. However, successful implementation is rare. We will discuss three basic concepts that can be applied to institutional portfolios or investment funds.
“The Portable Alpha concept tries to enable investors to access more and better Alpha sources. There are basically three ways to achieve additional Alpha.
“Solution 1 to (portable) Alpha can be called Alpha (directly) replaces Beta (Alpha for Beta): The approach is to replace a portion of the existing portfolio – usually by selling Beta exposure - with a pure Alpha investment.
“Solution 2 to (portable) Alpha may be called Hedging out (unwanted) Beta (Beta Transfer): In this case managers/funds will be selected based on their ability to generate Alpha, without considering the nature of their systematic risk exposure.
“Solution 3 to (portable) Alpha is the Alpha Overlay: In this case the existing portfolio with all Beta exposure remains unchanged, and the performance of pure Alpha managers is imported via a total return swap.
“An Alpha overlay can…add significant additional returns to almost any portfolio without adding a proportional amount of risk. Hence such Alpha overlay should be considered by investors as a very attractive tool to enhance overall portfolio returns. However, successful – especially hedge fund based – implementation has been realized in only very few instances.”
