Next Up for Advisors is Porting Alpha

By: Mike Clowes, Investment
Published: May 1, 2006


“The concept of portable alpha has been a hot topic in the institutional world for about the past three years, and now it is seeping into the individual-investment world. Does portable alpha have any relevance to the financial planner and their clients? That depends on whether the individual investor has placed constraints on the investment portfolio. If the individual has established no artificial constraints on the portfolio, alpha can be sought without concern about transporting it to another portfolio, though market risk may be hedged out.

“Porting alpha involves generating alpha in one portfolio and then, through the use of derivatives, moving it to a different portfolio. Suppose an investor has established an equity asset allocation that calls for no more than 10% of the assets to be invested in small-cap-growth stocks, because of their market risk. The remainder of the portfolio might be invested in a core equity portfolio. At the same time, the investor wants to generate market-beating returns. The financial planner or investment adviser can use alpha-porting techniques to give the client market-beating returns while maintaining the 10% maximum exposure to small-cap-stock risk.”

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