Portable Alpha

[rexthedog]

If you could choose one interesting country for long term Beta in a portabla alpha strategy, which country would you pick, and why?

[DPBass88]

I can’t answer that question, but I would ask why would you want to find country’s beta unless you’re just trying to track/hedge some portfolio risk? Shouldn’t you be more concerned with trying to find alpha? I would say choose the beta that best tracks the systematic return/risk of your overall portfolio strategy then find alpha.

[221991]

i second what DPBass88 said in the above. But let’s assume that the question made sense in practice, you would have to choose the bellwether economy which is the united states. Why ? because most of the dollar funding in the world is USD denominated in some way or another - and funding/capital is leading indicator of the health economy (along with cycles) if you know where to look.

[ohai]

By definition, this is not “portable alpha”. Assuming your question, then, is which country’s Beta would someone choose, the answer, among large economies, has to be USA. It’s the largest, most diverse, and most robust national economy. Compared to other countries, it has the most stable political system, even with Trump: Italian or Spanish separatists could dismantle the EU at any time. The US is more resilient to trade shocks than Germany or China. Furthermore, it has the deepest, most liquid, and probably well priced financial assets. So, you would be less likely to experience fraud or a liquidity crisis, compared to most other countries. Lastly, the US has had a history of out-innovating all other countries in recent history. Where will the next world changing technology or process come from that has not yet been priced into assets because it hasn’t been conceived? Probably from the same country that made Apple, Amazon, Uber, Netflix, Microsoft, or other entity that is taking over the global economy.

[rexthedog]

@ohai

By definition, this is not “portable alpha”. Assuming your question, then, is which country’s Beta would someone choose, the answer, among large economies, has to be USA. It’s the largest, most diverse, and most robust national economy. Compared to other countries, it has the most stable political system, even with Trump: Italian or Spanish separatists could dismantle the EU at any time. The US is more resilient to trade shocks than Germany or China. Furthermore, it has the deepest, most liquid, and probably well priced financial assets. So, you would be less likely to experience fraud or a liquidity crisis, compared to most other countries. Lastly, the US has had a history of out-innovating all other countries in recent history. Where will the next world changing technology or process come from that has not yet been priced into assets because it hasn’t been conceived? Probably from the same country that made Apple, Amazon, Uber, Netflix, Microsoft, or other entity that is taking over the global economy.

Thank you Ohai for the detailed answer. If one took an underlying futures position in USA (say s&p) and paired it with a market neutral manager in USA or another country, I am confused why this would not be a portable alpha strategy?

My question was purely in association with the beta component, and assuming the alpha manager is already taken care of.

Thanks,

Rex

[rexthedog]

@rexthedog

@ohai

By definition, this is not “portable alpha”. Assuming your question, then, is which country’s Beta would someone choose, the answer, among large economies, has to be USA. It’s the largest, most diverse, and most robust national economy. Compared to other countries, it has the most stable political system, even with Trump: Italian or Spanish separatists could dismantle the EU at any time. The US is more resilient to trade shocks than Germany or China. Furthermore, it has the deepest, most liquid, and probably well priced financial assets. So, you would be less likely to experience fraud or a liquidity crisis, compared to most other countries. Lastly, the US has had a history of out-innovating all other countries in recent history. Where will the next world changing technology or process come from that has not yet been priced into assets because it hasn’t been conceived? Probably from the same country that made Apple, Amazon, Uber, Netflix, Microsoft, or other entity that is taking over the global economy.

Thank you Ohai for the detailed answer. If one took an underlying futures position in USA (say s&p) and paired it with a market neutral manager in another country, I am confused why this would not be a portable alpha strategy?

My question was purely in association with the beta component, and assuming the alpha manager is already taken care of.

Thanks,

Rex

[rexthedog]

Deleted

[rexthedog]

Whoah, sorry for the above, my webpage just went a bit mental.

[221991]

Hi,

I think the country thing is confusing you, thinking about countries as BETA/ALPHA is wrong. Even within the US you can have several markets with several different benchmarks for different purposes - that is the key word for managers, “benchmark”. A manager in the Phillipines can run a market neutral large cap equity US strategy (which in your case would be the “portable alpha”, assuming they actually make money) while you have your long S&P position.

The portable alpha is return that is not correlated with the benchmark which in our case is the SP500, but could also be the BANKXYZ BOND INDEX - a portable alpha manager has to select securities within that universe to outperform the market without being highly correlated to the index (which is the beta)…

On a side note, in practice no one would actually take a futures position as the beta and add to that position with a mkt neutral fund manager.