The extra kicker – adding portable alpha to liability-driven investments

Oct 2nd, 2006 | Filed under: Portable Alpha & Alpha/Beta Separation | By:
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By: Andreas Jaggi & Stefan Scholtz, RMF
Published: July 2006, Hedge Funds Review

This is a moderately technical article by RMF rocket scientists in the UK.  But for those so inclined, it provides a good mathematical example of porting alpha (factoring in the effect of inflation on a pension’s liabilities).

“A large number of UK pension plans face funding shortfalls which are only being exacerbated by rising liability costs.  Portable Alpha strategies which “port” the added value or “alpha” from one asset class onto a benchmark asset to generate additional investment returns, can provide a solution to this dilemma.”

But the term “portable alpha” has come to describe more than “porting” alpha from one asset class to a benchmark.  In fact, the authors simply use a fund of hedge funds as a “ready-to-port” alpha source and continue their analytical process without missing a beat.   

“In this example a highly diversified funds of hedge funds is used as the alpha provider while the benchmark is accessed via a swap.”

This might have something to do with the fact that RMF’s parent, Man Investments, is the largest hedge fund company on Planet Earth, with AUM roughly equivalent to the GDP of Croatia (someday we’ll all be working for the Man).

The bottom line is that the term “hedge fund” no longer refers to “hedging” and the term “portable alpha” no longer refers to “porting”.  Still, this is a solid piece of work that might be better described as simply another “alpha-centric” strategy. 

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