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Browse by CategoryHome » Category List » Portable Alpha
Day one from the un-named event in London2 June 2008We report today from a three-day London gathering of some of the world’s largest institutional investors and the hedge funds that serve them (see postings from sister event in Boston last fall). The event focuses not on hedge funds per se, but on how institutional investors use them (portable alpha, fees, alpha/beta separation, 130/30, alternative beta, analytics etc…all the good stuff). In order to create an open atmosphere for candid discussion, organizers have us on a tight leash (there are otherwise no media present here and we can’t even tell you the name of the event). And while we can’t really tell you who said what today, we can pass along some of the major themes from the conference floor. Here’s some of what we heard… Hedge Funds: Innovation from the garage?
Most here held the opinion that “hedge funds” was no longer a useful definition of an asset class. One panellist put it in terms of innovation. He described hedge fund companies as a “platform for innovation”. In an allusion to innovation in the technology sector, he said that “innovation usually happens in garages”, not in large corporations (a clear reference to the oft-cited garage where tech behemoth Hewlett Packard was born - pictured above). In other words, it may be difficult for a large traditional manager to deliver on the major promise of the hedge fund sector - innovation. Issues such as profit- (and risk-) sharing, for example, can often confound the efforts of long-only managers (e.g. banks – see related WSJ piece from last week) to maintain hedge fund programs over the long term.
Comments »Weekly Newsreel: Madrid, Stockholm, Maple Syrup and 130/3025 May 2008
Nervous alternatives managers could be leaving alpha on the table: P&I reports from ”AlphaMax” in Madrid that “Fees became a point of contention between pension fund executives and hedge fund managers…with the pension executives arguing that the typical hedge fund management fee of 2% and performance fee of 20% can be a deterrent…” 8 out of 10 managers fail to add value: Meanwhile in Stockholm, Watson Wyatt’s Roger Urwin tells another conference why pensions have an allergy to “2 and 20″.
Comments »One of portable alpha’s originators says concept has evolved, in some cases, into something “vastly different”11 May 2008PIMCO’s Chris Dialynas knows portable alpha. In fact, commentators such as author Peter Bernstein generally agree that PIMCO essentially invented portable alpha back in the 1980s in the form of the firm’s “StocksPLUS” and “BondsPLUS” products (see related posting). Dialynas joined PIMCO way back in 1980 - surely before several of PIMCO’s current junior analysts were even born. So when he cautions the world about the movement he helped create, we’re probably best served by listening closely to what he has to say. He is the author of the epilogue to the new book “Portable Alpha Theory and Practice” by Sabrina Callin (see related posting). The chapter is ominously titled “Portable Alpha - The Final Chapter: Schemes, Dreams, and Financial Imbalances: ‘There Must Be More Money’” and it amounts to something of a sanity check on the current state of portable alpha. The entire chapter can be downloaded here at AllAboutAlpha.com. While cautious, Dialynas doesn’t actually question the underlying rationale behind alpha-beta separation or portable alpha itself. Instead, he expresses his concern that the techniques often used to create or isolate pure alpha (leverage and derivatives for example) have led to unacceptable risks to the financial system (think: Richard Bookstaber’s “Demons of Our Own Design” - see related posting). Says Dialynas:
Comments »Author of New Book: For more return without more downside risk “there are only two options”23 April 2008
Now someone has finally brought many of these concepts together in one place. “Portable Alpha: Theory and Practice” (US link) edited by PIMCO’s Sabrina Callin has just hit bookstores. If you read Peter Bernstein’s “Capital Ideas Evolving” (see related posting), you may recall that PIMCO is considered to be one of the early pioneers in portable alpha strategies. Naturally, we’re working our way through it right now and are so far impressed with the holistic nature of the content (including contributions by Rob Arnott, Bill Gross and several PIMCO managers). Yesterday, AAA media partner HedgeWorld ran an interview with Callin for its premium subscribers. With permission from our friends at HedgeWorld, we have re-printed the interview in its entirety below. But before you read the interview, here’s a quick footnote. It appears that Portable Alpha has a lot of fans in the UK and Singapore. A Google search of this book returns the publisher’s country-specific websites in the following order: UK, Singapore, US, Germany, Canada. A flagrantly un-scientific observation for sure. But curious nonetheless…
Comments »Pennsylvania is also “Portable Alpha Country”23 April 2008
The AP reports that the Pennsylvania State Employees Retirement System has been getting a lot of fan mail after it announced a 17% return last year. Reports AP:
John Winchester, the plan’s CIO, tells AP that his goal is to “whether a variety of different market environments”. It appears he may stick with the nearly 25% allocation to hedge funds and private equity for some time. As the AP points out:
The SERS website breaks down the numbers:
Comments »Portable alpha demoted to “low opportunity” in new survey of consultants25 March 2008Regular readers will remember that in 2007, portable alpha and 130/30 were deemed to be “up and coming” by management consultancy Casey Quirk & Associates (see related posting). The firm surveyed 49 North American investment consulting firms and found that portable alpha, liability-driven investing and 130/30 “may not represent a search focus, but see rising interest in conducting search activity.” Casey Quirk just released the results of its 2008 survey. And this new edition concludes that 130/30 and LDI remain “up and coming”, but portable alpha has been told to clear out its desk and move to “low opportunity” with commodities and fixed income. (”Low opportunity” is defined by the report as any asset class “faced with declining interest and little focus from the consultants in 2008.”) Here is how Casey Quirk saw the world back in March 2007…
Comments »More on fixed income portable alpha5 February 2008In a December 2007 discussion paper, Franklin Templeton’s Australian fixed income group said it is seeing, “especially strong interest in the application of portable alpha to fixed income investing.” (Prudential’s fixed income group and Morgan Stanley’s Portable Alpha team would likely agree.) The paper is solidly alpha-centric:
While making the generic case for alpha/beta separation and portable alpha, it also suggests that the firm’s “Global Absolute Return” is an ideal source for the alpha component of the strategy. Says the paper:
Comments »130/30 Experts: pick your compensation… “attractive”, “competitive”, or “outstanding”22 January 2008
According to a survey released on Monday, asset management staff turnover in the UK has reached new heights. Thomson Investment News comments:
On the other side of the Atlantic, this seems to translate into an apparent need for 130/30 experts. Do you pay “extreme attention to detail” and looking for “attractive” compensation? Then a leading NY-based quant manager wants you. The firm is one of three that has recently posted 130/30 jobs at a popular financial career site. According the posting:
Comments »New paper explains “muted demand” for portable alpha3 January 2008
By this standard, Larry Gorman is a name to watch. The Cal Poly professor has a unique ability to come down from the ivory tower to help the rest of us get our head around the pressing academic issues of the day - the Fundamental Law of Active Management, 1X0/X0, and the true meaning of alpha, for example. But don’t take our word for it, Gorman has been named “Most Outstanding Faculty” in the Cal Poly finance department each of the past fours years. Gorman recently teamed up with professor Robert Weigand of Washburn University to write this relatively easy to digest paper covering some of the roadblocks on the path to alpha-centric investing (called “Measuring Alpha Based Performance. Implications for Alpha Focused, Structured Products”). Warn the duo:
Comments »Mutual fund company launches retail portable alpha funds based on “real” alpha3 December 2007
For several years now, academics and practitioners alike have questioned whether the alpha reported by hedge funds is ”real” or whether it’s just alternative or “exotic” beta. Yet it seems the mutual fund industry has been largely immune to such rigorous analysis. Once the influence of the market is removed from a mutual fund’s return stream, it is often assumed that what remains must be alpha. However, this alpha is no more “real” than the alpha produced by a market neutral hedge fund. Now Investment News reports that one mutual fund company has applied concepts such as “exotic beta” to the mutual fund industry. The result is a sort of packaged portable alpha solution for US retail investors:
The idea of pre-packaging alpha and beta in various, flexible combinations is the stock-in-trade of many funds of hedge funds (see related posting). But Investment News may be right that the mutual fund industry has never really embraced portable alpha-like solutions. FundQuest may have institutional investing in its blood, however. It’s owned by BNP Paribas, the mega-manager with deep institutional roots.
Comments »Convergence at The Rockefeller Center7 November 2007
Organizers of this conference on “Portable Alpha & 130/30” clearly saw that these two strategies shared fundamental similarities. But quite unexpectedly, the totally separate topic of “alternative beta”, also reared its head several times throughout the course of the day. In retrospect, it makes a lot of sense. Advocates of portable alpha have long argued that alpha can be isolated from a traditional long-only fund by simply shorting out market exposure. And if a “ready to port” alpha source such as a fund of hedge funds is used, then its returns must already be uncorrelated with the beta source to which it will eventually be married.
Comments »Blogger’s Notebook: “Portable Alpha & 130/30 USA”7 November 2007
Blazing a trail for me today were several regular portable alpha commentators including the following… Yoshiki Ohmura, head of portable alpha strategies at GAM, told the crowd here that portable alpha strategies don’t actually overlay alpha onto beta, but overlay beta onto an alpha source. While it may sound pedantic, this interpretation supports the view that portable alpha is as much about betas as it is about alphas (as discussed above). In addition, he said that alpha often contains extranious betas (what other, more saucy commentators have called “dirty beta”). Man Investments’ Angelo Calvello led an interesting panel on whether portable alpha had “lived up to the hype”. A fierce advocate of alpha-centric investing, Calvello argued that portable alpha is anything but a fad. While bristling at the term “paradigm shift”, he did pronounce to the audience that “shift happens!”.
Comments »Alpha “Unleashed”4 October 2007
Hubrich says that portable alpha is “alpha unleashed” - which is great, assuming you haven’t unleashed a negative alpha crazed dog, of course. But instead of stopping at the marketing hyperbole, he proceeds to go into 45 pages of detail on how exactly to unleash your alpha. He says that a number of critical questions must be answered before opening the cage door:
Comments »CIO of $32b Swedish National Pension Fund: Portable Alpha has ‘Merits and Risks’9 September 2007If you are in the institutional investment business, you have likely heard the name “AP3” before. The SEK $228 billion (US$32 billion) fund announced in May that it would manage its alpha and beta portfolios separately from now on. According to AP3, “(The) fund’s aim by separating alpha and beta is to make the portfolio structure more flexible, improved risk diversification and higher cost efficiency in order to increase the potential return.” Erik Valtonen, CIO of AP3, will reflect on the fund’s experience later this week at an industry gathering in Hong Kong. But today in this AllAboutAlpha.com exclusive, Valtonen tells us why portable alpha has both “merits and risks”.
Special guest contribution by: Erik Valtonen, Chief Investment Officer, AP3
Alpha and beta Return streams are traditionally divided into beta and alpha components, although it seems to be difficult to define exactly what these labels are. Obviously, the origin of the labels lays within the CAPM, where beta is a measure of the exposure to market risk and alpha is the intercept. In this spirit, beta can be defined as the return that is gained by a passive exposure to some risk premium. Traditionally, these exposures include equity and bond markets but recent years have seen the birth (or rather recognition) of a plethora of ‘alternative betas’ ranging from small cap premium to liquidity. Alpha, on the other, could be defined as that part of the return stream that is not explained by beta . To add positive alpha the manager needs to exhibit skill (or luck) either by securities selection or by timing. Ability to allocate between different beta factors will produce alpha, so the distinction between alpha and beta is not always clear cut, and will depend on the time horizon where the returns are viewed. As an example, a GTAA manager will typically allocate his risk budget between various beta sources. At any point of time the manager will have different beta-exposures but these are not static but are managed dynamically. The manager’s skill exhibits in his ability to find the right mix of beta exposures.
Comments »Deutsche Bank hedge fund-of-funds joins march on retail market13 August 2007
The fund is called DWS Alternative Allocation Plus and according to the DB’s press release, it will use the firm’s year-old “iGAP” strategy (”Integrated Global Alpha Platform”). The iGAP has so far been offered only to institutional investors (see press release announcing that fund’s launch back in 2006). We put portable alpha in quotations since we’re still not clear whether this fund really involves porting alpha - the refining, manipulating, or recompiling alpha and beta. According to DB, the fund is a simple fund-of-funds that may also include “other derivative instruments”.
Comments »Conference proceedings amount to alpha-centric radar screen15 July 2007
P&I recently posted the conference proceedings and most of the slideware from the event on their website. Naturally, it’s hard to follow many of these presentations without the benefit of having heard them yourself. But for those of us who were busy those weeks, the presentation materials are still somewhat indicative of major trends and issues in alpha-centric investing. The agendas for both events were basically the same (with one notable exception - see below). Here is a listing of some of the more alpha-centric agenda items along with links to related AllAboutAlpha.com content:
Comments »"Bundled" Portable Alpha: A Bridge Across The Portable Alpha Chasm?4 July 2007
So says Angelo Calvello of Man Investments in an “institutional investor only” white paper released earlier this year. Calvello is one of the instigators of the alpha-centric revolution, using the term “alpha-centric” as far back as 2005 (see related posting). Acknowledging the operational challenges inherent in a relatively complex strategy such as portable alpha, he now proposes a “bundled” solution that wraps the various components of portable alpha into one entity, such as a special purpose vehicle or a fund). According to Calvello, this would dramatically simplify the lives of pensions and endowments that are current reticent about diving into portable alpha.
Comments »Morgan Stanley puts fixed income portable alpha webcast online31 May 2007
The call is hosted by Jack Coates who heads up Morgan Stanley’s Portfolio Architecture team. Before joining the firm, he was the managing director of Weyerhaeuser’s Pension Fund Investment Group. Portable Alpha enthusiasts will know his name since Weyerhaeuser pioneered portable alpha investing well before it was all the rage. Read the rest of this entry »
Comments »A quarter vs. three nickels and a dime…13 May 2007
Okay. So what? Well, this Vanguard article entitled “Alpha-Beta Separation: Appealing Theory, Problematic Reality“, begins with the familiar line “Would you rather have a quarter or three nickels and a dime?”, and goes on to describe alpha as the dime and beta(s) as the nickels.
Comments »Poll of institutional investors shows they face a "sea of ambiguity"9 May 2007
This interesting report reminds us of the enormity of this communication and education task. Consulting and advisory firm Strategic Investment Group sponsors a number of roundtable sessions involving institutional investors each year to discuss topical issues in the industry. They call this initiative the “National Strategic Investment Dialogue” (NSID) and its output is summarized in a report at the end of each year. While these annual reports are not available to the general public, NSID has allowed us to provide you the 2006 edition in full here. The 2006 Year in Review report finds that institutional investors are “…afloat on a sea of ambiguity”…
Comments »Fixed Income: A return to the glory days of yesteryear?2 May 2007
It’s not the most impassioned plea for the crowds to return, but it’s strangely compelling nonetheless. Rather than advocating a “back to basics” fixed income strategy, Putnam says that financial innovations such as credit default swaps have enables a whole new world of alpha-centric fixed income strategies such as (but not confined to) portable alpha. And as we’ve pointed out before on this website, “fixed income” and “portable alpha” don’t often appear in the same sentence.
Comments »EVENT: Portable Alpha & 130/30 Strategies 200718 April 2007Location: New York In a great example of real-time market response, organizers of “Portable Alpha USA” have recently added “130/30″ to the mix. While these two topics might appear to be slightly different species, we argue that they are part of the same genus: alpha-centrus investingae. Portable Alpha advocates would have investors lever their beta (keeping it at the same level) and use the capital to allocate to an alpha source. Similarly, 130/30 also involves alpha/beta separation, but keeps the beta 100% funded and effectively allocates to an “unfunded” market neutral alpha source (well, at least not truly “unfunded” since the beta source essentially acts as collateral for taking on the short positions). Some of our favorites will be there: Harvard’s Randy Cohen (related posting), Prudential’s Michael Lillard (related posting), Man Investment’s Angelo Calvello (related posting), Casey Quirk’s Jeb Dogget (related posting) and Wilshire’s Jim Dunn (related posting). Read the rest of this entry »
Comments »Northwater launches new “portable alpha” funds3 April 2007Quant manager Northwater launched two new funds today that it calls “portable alpha funds”. They’re interesting offerings that definitely bifurcate alpha and beta. But they also show how the term “portable alpha” is sometimes stretched to include anything that explicitly recognizes alpha and beta. In a nutshell, the Northwater products combine either Lehman Agg or S&P 500 beta with Northwater’s market neutral fund of hedge funds. The betas are purchased synthetically (via swaps) and the majority of capital is then allocated to the market neutral fund of funds (which targets 275 bps to 475 bps of “alpha return” after fees). As a result of the construction of the swaps, the funds gain 100% exposure to either underlying index and 100% exposure to Northwater’s fund of funds.
Comments »Valentine’s Special: Canada’s Secret Crush on Portable Alpha15 February 2007
Hansen presented the results of a study conducted by Greenwich Associates in various countries last year. The study involved interviews with 2,400 institution in the US, Canada, Britain, Continental Europe, and Japan. Most of the people in the conference room - including Alpha Male himself - were amazed to learn that Canadian pension plans harbour a deep secret: they actually love Portable Alpha.
Comments »Smart Money Going to Portable Alpha: Conference Attendees7 February 2007February 7, 2007 (Geneva) - AllAboutAlpha.com contributor Mark Baumgartner of Morgan Stanley says that Portable Alpha is on the minds of attendees of this year’s Institutional Fund Management conference in Geneva today. Baumgartner reports the results of an electronic poll of audience members conducted this morning during a session entitled “Predicting Where the Smart Money is Going: Tomorrow’s Successful Products and Investments”. In response to the question: “Where will the smart money go in tomorrow’s products?”, the results were:
The audience was made up of institutional investors and practitioners from Europe and the US.
Comments »Turning theory into reality19 January 2007By: Hugo Greenhalgh, FT Mandate
A Disruptive Financial Technology Greenhalgh suggests the development of new financial technologies is enabling portable alpha:
Comments »EVENT: Strategic Portable Alpha5 January 2007
With more snow in Dubai than in Switzerland this winter, you may find yourself in the Gulf region with a few days to kill in January. This workshop promises to help you “enhance and gain an intuitive understanding of portable alpha from a practitioner’s viewpoint”.
P.S. Speaking of conferences, if you are a compliance officer looking for pretty good ideas, but not the “best” ideas, you might also be interested in this intriguingly-titled event organized by FRA: “2ND BEST PRACTICES FOR CONDUCTING THE REQUIRED ANNUAL COMPLIANCE REVIEW FOR INVESTMENT ADVISERS”
Comments »I know what you did last summer…you wrote a paper lambasting portable alpha13 December 2006“Inefficiencies of Portable Alpha Models”
Ah, those hazy lazy days of your college summers. Summer jobs, parties, weekends at the beach, writing portable alpha research papers. Princeton undergraduate student Eric Murphy did just this, finishing off his clearly worded, logical argument against portable alpha in the dog days of last summer. In the paper, he makes two central arguments:
Comments »Portable Alpha: A Practitioner’s Guide13 December 2006By: Jack Coates & Mark Baumgartner, Morgan Stanley
Morgan Stanley’s Jack Coates and Mark Baumgartner clearly believe in portable alpha. However, this article contains more than portable alpha cheerleading. It also provides a good, non-technical overview of implementation issues such as: embedded betas, trading considerations, leverage & liability. But the following chart, depicting the growing media interest in portable alpha, particularly caught our eye:
Comments »Shark Attacks, Fast Food, Bad Drivers and No Place to Hide12 December 2006This is the final dispatch from Alpha Male’s road trip to Institutional Investor’s “Alpha Generation Forum” in New York I’d be the first to admit alpha centric investing (portable alpha, active overlays, 1X0/X0 strategies, hedge funds, ETFs etc.) can be brutally boring sometimes. But to their credit, the speakers at this event kept us all awake without need for intravenous caffeine drips or too many of those jam-filled conference pastries. I found three of the speakers to be particularly engaging – mainly due to their enthusiasm about what they see as a fundamental shift toward alpha-centric investing: Mark Baumgartner, Executive Director of Morgan Stanley’s portable alpha group, Angelo Calvello, the newly-minted North American EVP at Man Investments, and Laurence Siegel, Research Director for the Investment Division of the Ford Foundation.
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After years of steady growth, it’s no surprise that traditional long-only money managers have been licking their chops over the potential to offer hedge funds. Meanwhile, hedge funds have been strangely attracted to the gazillions of dollars under management by the long-only managers. Today in London, managers and investors debated the relative merits, not of hedge funds and long-only funds, but of hedge fund management companies and long-only management companies. While many people can tell you the difference between a hedge fund and a traditional long-only fund, few seem to agree on the unique characteristics of each type of company.
The term “portable alpha” is still a relatively new addition to the popular lexicon. As we’ve written on these pages, the term itself seems to morph on a regular basis to encapsulate the literal “porting” of alpha between asset classes to the combination of hedge funds and swaps. Issues like active management fees, regulation, risk measurement, and market efficiency seem to weave their way in and out of the various definitions of portable alpha. 
Pennsylvania is not only the latest battleground between the Democratic presidential contenders, it’s also one the biggest battleground between traditional long-only investing and alternative investments. 
As outside observers of the academic literature surrounding alpha-centric investing, we always find it curious that the easiest-to-read, most accessible papers and presentations are usually written by some of the field’s most accomplished and technically sophisticated members. William Sharpe, Eugene Fama, Andrew Lo, Jacobs & Levy…each seems to be able to cast aside the trappings of academia and present cogent arguments in laymen’s terms.
Can you spot a fake? 
There comes a point in the evolution of many news ideas where the lines begin to blur between topics previously thought to be distinct. This convergence of seemingly disparate disciplines is reminder that each topic has more in common that previously thought. That moment of convergence came today at an event across the street from the storied Rockefeller Center and down the way a little from the Radio City Music Hall in New York. 
Day one of this event focused on portable alpha, while day two (Thursday) will focus on 130/30. Trying to draw a link between the two days has been left up to Alpha Male as moderator of a panel called “A side by side look at portable alpha and short extension strategies”. Wish me luck.
Just in case you thought portable alpha was a slam dunk and you have moved on to other issued like hedge fund replication or 1X0/X0, check out this 
Portable alpha is certainly a concept that has quickly made an entry to the every investment professional’s vocabulary. Even smaller investment managers are now talking about the merits of porting alpha. In this brief note I make a short summary of the concept, and highlight some of its merits and risks.
With the ink still wet on UBS’s agreement to manage a 130/30 fund for Canadian retail investors (
In the spring, we told you about 
While nearly all institutional investors are now clear about the benefits of portable alpha, many are still put off by its often complex mechanics. Unlike a simple active long-only mandate, a portable alpha strategy can often involve multiple accounts, the assumption of counterparty risk when using swaps for beta exposure, and cash management and rebalancing due to collateral requirements, not to mention new reporting and analytical requirements. These challenges - amplified by the headline risk of potentially dropping the ball somewhere along the line - have put the breaks on portable alpha programs at many institutions. This, even as these investors readily acknowledge the theoretical advantages of such a strategy. 
For those readers who have been emailing us looking for more information on portable alpha in the world of fixed income investing, you’re in luck. Morgan Stanley has made a recent presentation and accompanying conference call recording available to readers of AllAboutAlpha.com via Morgan Stanley’s AllAboutAlpha 
Does anyone remember the series of fake commercials on Saturday Night Live in the late 1980’s for the “First Citiwide Change Bank”? (click 
The benefits, costs and risks of 130/30, portable alpha, hedge funds and other emerging investment techniques are now quite clear to those immersed in the hedge fund and asset management community. As we debate abstract ideas such as market inefficiencies, it’s easy to become frustrated with the pace of adoption. But the fact remains that communicating these ideas to a broader audience of investment committees and advisers remains a critical step in the gradual acceptance of alpha-centric investment techniques.
Like proprietors of some great tourist destination whose hayday has passed, Putnam Institutional Investments laments the lack of interest in fixed income investing in the age of portable alpha in their 
Alpha Male was a moderator and panelist last week at an alternative investment conference in the Great White North. One of the other speakers at the event was 
FT published a good overview of portable alpha in November. It’s a follow-up to FT Mandate’s June 2006 piece called “
Location: Abu Dhabi
By: Eric Murphy, Princeton University
last week.
