Portable Alpha…

What’s the hottest investment strategy in Wall Street these days? That should be nothing but "Portable Alpha". "It sounds much like a portable device which can be applied when people travel to the moon instead of a investment tool which may help you to increase your retirement funds." Scott Patterson, a WSJ journalist said.

Then what is "Portable Alpha" and how does it work? Here is a short introduction from Wikipedia:

Portable Alpha is strategy that involves the use of active investment management to create exposures in securities or financial instruments in markets that may be unrelated to that of the primary market exposure (or beta) of the portfolio. The active return (or alpha) generated is hence "portable" since it has been "ported" from a market unrelated to the beta.

portfolio return = α + β * market return

where β is the extent with which the portfolio moves with the market. The passive part of the portfolio is β and α is the active part of the portfolio, which is generated by active management techniques.

If the portfolio manager can improve alpha by investing in securities that are not correlated with the beta of the existing portfolio, that manager can create a portable alpha.

An example of a portable alpha strategy could be the following; A manager has skill in picking under/out performing stocks in Japan. However, his client prefers have an exposure to the US equity market (and particular, would like to out-perform an S&P500 index benchmark). The manager could pursue a portable alpha strategy by investing passively in the S&P500 (e.g. by using futures), whilst taking "long/short" Long_/_short_equity positions in Japanese stocks based on his stock-picking skill. Assuming this skill held up, he would then deliver a portfolio return equal to;

portfolio return = α + β * market return

portfolio return = [Japanese stock-picking performance] + [S&P500 return]


About thomaszhu

"In the designs of Providence. There are no mere coincidences."

3 Responses to Portable Alpha…

  1. 大居士说道:


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