Quant 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.
Bob Kulperger, a VP at Northwater tells AllAboutAlpha.com that the core fund of funds program has been engineered to have virtually no statistically meaningful beta to either the Lehman Agg or the S&P 500 – making it a good alpha source. He says the offering is a packaged version of what the firm has been offering its largest clients on a customized basis for nearly 10 years.
Although alpha/beta separation is new to most institutions, Northwater essentially argues that the real magic is in the execution, not in the beta and alpha sources per se. For example, it espouses its trademarked “Portable Platform” (both “an approach and technological platform” according to Kulperger) and it refers to itself in this latest press release as:
“…portable alpha managers – with a track record of managing portable alpha mandates to various equity, fixed income and liability-driven benchmarks.”
That’s probably a more accurate interpretation of the term “portable alpha”. We believe portable alpha is an approach, not a product. Northwater has made this approach a central part of its value proposition. And for that, it deserves kudos – even though these new “portable alpha funds” aren’t technically “porting alpha” from one place to another.
Addendum: We humbly propose the term “adjustable alpha” for packaged offerings like this – reserving “portable alpha” for customized service offerings where alpha is truly “ported” from one place to another in response to clients’ unique risk aversions and investment mandates.