Portable Alpha

By: Angelo A. Calvello Ph.D., State Street Global Investors
Published: October 15, 2003


The new paradigm rejects total return as the measure of a strategy’s worth. It instead holds steadfast to the principle that any strategy’s total return can be divided into a market return and (ideally) a net excess return. The market return component is quantified as beta and the excess return component is quantified as alpha. What is of real value is the strategy’s ability to consistently generate alpha.

The idea of portable alpha has been around for over twenty-five years, with Bridgewater, SSI, and First Quadrant being early (and persistent) proponents. Numerous institutional investors have implemented portable alpha strategies into their portfolios. Beyond the nascent demand for portable alpha strategies among some of State Street Global Advisors’ (SSgA) clients there are additional signs that this paradigm shift is occurring.

“I make presentations to pension plans with a half a dozen active managers in style and market capitalization boxes. If these funds separated their alpha and beta, they would find risks and returns are nearly all beta. All they have is an expensive index fund.

This separation and recombination of beta and alpha is only one of the fundamental principles of the new investment paradigm. The other, the search for alpha as separate and apart from an institution’s policy asset allocation, is equally primordial. The paradigm shift is coming. [As Lee Thomas, Chief Global Strategist at PIMCO, says], ‘My sense is that the world is pregnant for a revolution in investment management. It feels like 1935, when people knew that the current macroeconomic thinking didn’t work and then Keynes published his General Theory. The separation of alpha and beta is similarly powerful.’

UPDATE: Calvello has since moved to Man Investments and unfortunately this article has been removed from the SSGA website.

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