By: Vince Calio, Pensions & Investments
Published: October 30, 2006

Okay, so not everyone is a huge fan of portable alpha.  Can you blame them after all the hype?

But as the recent Goldman Sachs Annual client pow-wow illustrates, there remains much debate over basic definitions.  According to Pensions & Investments, endowments are particularly skeptical of portable alpha.  They argue that their long time horizons and lack of liquidity requirements mean they can plough all they want into pure alpha strategies without concern for back-filling the beta:

“‘Actually, one of the first things we did when I got here a year ago was to get rid of our portable alpha manager,’ said David Russ, chief investment officer of the $3 billion endowment fund of Dartmouth College…’Our job is to control costs and look for alpha. We don’t have the liquidity requirements of a pension plan and therefore, we can afford to make direct investments in the higher returning asset classes.’ He declined to name the manager.

But not all endowments agreed with Russ.  According to P&I, Don Fehrs, until recently the CIO of Cornell’s endowment, told conference attendees that the strategy could still serve a purpose, regardless of time horizon or liquidity constraints:

“…’there are places we use portable alpha strategies that made sense,’ Mr. Fehrs said. ‘We used a portable alpha strategy in the commodities space because there were no (active) managers in that area with a long-term track record of adding value,’ he said.”

Finally, Ray Dalio, CEO of Bridgewater Associates, (who has made portable alpha central to his company’s strategy) laid down the law:

There seems to be confusion on their (the endowment officials) parts. Portable alpha as a structure shouldn’t be more expensive than non-portable alpha as a percentage of the total alpha, so it’s not a more expensive strategy. The willingness to withstand higher levels of volatility shouldn’t make anyone less inclined to have portable alpha because the returns should be higher with a portable alpha strategy given any targeted volatility — and everyone would rather have higher returns, all else being equal.

It seems to us that there might actually be violent agreement over alpha-centric investing, just not over the appropriate role for beta.

Read Full Article (courtesy: Pensions & Investments)

Addendum: P&I’s “related headlines” just below this article on the P&I website suggest something (portable alpha?) is working at America’s largest endowments…

• “MIT endowment gains 23% for 12-month period”
• “Yale endowment earns 22.9% on investments”
• “Harvard University endowment returns 16.7%”