Portable Alpha Threatens the Established Investment Order

By: Milton Ezrati, Lord Abbett & Co.
Published: December 2, 2005

“Radically different and highly flexible, portable alpha will outlast the coming disappointment with hedge funds and, in time, irrevocably alter the business of investing in America, Europe, and Asia. 

“Portable alpha’s distinction and appeal lie in its ability to separate the two basic parts of portfolio management: the effort to generate superior returns (what the trade calls alpha) and the desire to maintain exposure to a particular asset class (what the trade calls beta). Conventional investing bundles these two objectives together. The portfolio manager tries to give the investor general exposure to an asset class or market index, mostly by diversifying holdings, while simultaneously trying to generate superior returns, usually by emphasizing particular holdings within that particular asset class. 

“The portable alpha approach, however, relies on one manager to achieve general asset exposure, usually through purchases of index futures, while relying on a completely different manager to seek superior returns. Typically, this second, or alpha, manager uses what are called market-neutral techniques, which have no link to a particular asset class, and might, for instance, match purchases of favored securities with short sales of less attractive securities. Because this alpha effort is separate from any beta exposure, it is said to be ‘portable'”.

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