Portable alpha demoted to “low opportunity” in new survey of consultants

Regular 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…

Ah, those were heady days for portable alpha.  But it’s all a distant memory now.  Check out this year’s opportunity map…  

Portable alpha was actually the only asset class to switch categories over the year.  So what happened?  Did portable alpha get a little too big for its britches?  Did consultants lose interest?  Or have investors internalized the concept so much that it has ceased to be the central focus of their manager searches?

Philip Kim, one of the report’s authors tells us that the focus on portable alpha fell for several reasons during 2007.  First, it succumbed to the general hesitation over derivatives and leverage in 2007 (both key ingredients in portable alpha);  second, it became more difficult to define as portable alpha variants proliferated;  and third, many investors began executing portable alpha strategies on their own using hedge funds of funds (meaning they did not actually search for a “portable alpha manager”).

A further read of the 2008 edition also reveals an interesting split between large investment consultants and small ones.  Apparently, portable alpha’s demotion was primarily a result of small investment consultants reducing their forecasts for portable alpha searches in 2008…

As you can see, last year more small consultants expected to focus on portable alpha, while this year, more large consultants expect to focus on portable alpha.  Says the report… 

“The number of large consultants focusing on portable alpha will grow substantially in 2008. Twenty-two percent of the large consultants expect to focus on this area in 2008, up from 13% in 2007. A number of these large consulting firms have committed to build dedicated groups specifically for educating the investment community about portable alpha and assisting with portable alpha searches.”

On the flip side, Casey Quirk describes the decrease in small consultants’ portable alpha interest as “a significant drop”.  And with 70% of respondents falling into that “under $100 billion” category, the writing was on the wall for portable alpha

Interesting, it seems that small consultants’ interest in 130/30 was also far lower than the interest expressed by their larger counterparts…   


However, with nearly two-thirds of respondents falling into the “over $25 billion” category, 130/30 safely retained its “up and coming” status.  (The same was also true for LDI.)

When all is said and done, portable alpha’s apparent losing streak may have more to do with nomenclature than with any fundamental issues.  Only time will tell.  But as Casey Quirk’s Kim told us earlier today, “Portable alpha is alive and well”.

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