Portable Alpha Investment Strategy: Better Mousetrap or Overly Risky?
| Jul 5th, 2006 | Filed under: Portable Alpha & Alpha/Beta Separation | By: Alpha Male |
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By: Scott Patterson, Wall Street Journal
Published: June 29, 2006
This article, published in June 29th’s WSJ, marks another step in the popularization of portable alpha. The article points out the dramatic rise in the popularity of portable alpha…
“The hottest investment strategy on Wall Street sounds more like something someone would take on a trip to the moon than a place to stash retirement funds.
“It is called portable alpha, and endowments and pension funds are throwing billions at it. Dean Barr, managing director of Citigroup Alternative Investment, a unit of Citigroup Inc., which plans to launch an extensive portable-alpha offering in August, says it is one of the fastest-growing strategies used by pension funds in the world.”
Interestingly, the article also identified an area of huge potential for the industry going forward….
“For now, average investors can’t invest in portable alpha, which, like hedge funds, are restricted to wealthy investors and institutions.”
However, the article cites critics who contend that portable alpha:
“…offers little real reward in the long run and lets money managers charge high fees to juggle the tricky parts of the investment.”
There is little question that a bifurcation of alpha and beta will lead to two different fee structures. Beta is cheap and alpha (or simply the search for alpha) is not. But as several academics such as Ross Miller of the State University of New York (SUNY Albany) have pointed out, the implicit fees for alpha in any active portfolio are much higher than those for beta (which are set by a perfect market). So new fee structures are more the result of more efficienct allocation of capital than they are a gravy-train for the financial services industry – although first movers such as Citibank could be securing a disproportionate share of the alpha business, leaving the beta for the lower-end “private label” producers. (for those Canadians out there, President’s Choice Beta – “Memories of Bay Street”).
The article contains a criticism of portable alpha from Efficient Frontier Advisors – an investment firm focusing on ETFs. Efficient Frontier’s criticisms are an indictment of active management as much as portable alpha per se. While market effciency is an open debate, it does not apply directly to the discussion of portable alpha per se.
Furthermore, Efficient Frontier’s argument that alpha will “thin” as assets flow into “the strategy” is suspect. What is “the strategy”? Why would pure alpha producers have this problem, but not traditional active managers? And why does Efficent Frontier argue there is no alpha, while simultaneously arguing that alpha will “thin”?
The bottom line is that portable alpha should generate returns that are no better or no worse than traditional active management – only more flexible.
- Alpha Male
