Returns Get New Lift: Portable Alpha Strategies
Aug 28th, 2006 | Filed under: Portable Alpha & Alpha/Beta SeparationBy: Suzanne McGee, Barron’s
Published: August 28, 2006
Suzanne McGee hits all the right notes in this article about Portable Alpha. Firstly, she tries to dispell the popular myth that portable alpha is complex.
“While it may sound exotic, the portable-alpha concept is straightforward. It simply hinges on the difference between the two basic investment-return flavors: “alpha” and “beta.”…Portable alpha simply takes the concept a step further, “porting,” or carrying, alpha to be wed to the beta and offering pension-fund trustees and other institutional investors the chance to have their cake and eat it, too.”
Then she answers lingering questions about whether portable alpha is a desperate marketing story from the hedge fund industry or the result of recent advances in securties “technologies” – the “Why now?” question.
“The advent of derivative securities has made it possible for an institution to put the same $100 million to work simultaneously in both large-cap stocks and alpha strategies.”
Finally, she quotes various industry experts who challenge various sacred cows in the investment industry: strategic asset allocation, style-boxes and hedge funds as a seperate asset class.
“Traditional active management won’t die, but the days of allocating 45% of your portfolio to large-cap, bottom-up stock-pickers are gone,” argues Rob Blackwell, managing director of research and strategy at Tacoma, Wash.-based Russell.
“The style box that long-only framework people have been working within has many constraints which leave money on the table,” says John Minahan, director of research at New England Pension Consultants.
“The next steps forward may be the most dramatic of all: a complete reshaping of the way institutions think about asset allocation and their portfolios.
“[Yoshi Ohmurahe of GAM Investment Management] predicts, ”Eventually, portable alpha will be portfolio-wide, and based on customized benchmarks…This is more than just another investment strategy; it’s a paradigm shift.” [Alpha Male's emphasis]
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