Portable Alpha Question

CFA Level III
#1

Hi everyone,

Thanks for taking the time to read this!

On page 221 of the Fixed Income book (2016) at the very bottom… it explains that portable alpha can still be used if an investor is restricted from using a long-short strategy…

The example says the investor desires S&P500 exposure but identifed a Japanese alpha manager who’s benchmark is the TOPIX index

The portable alpha would work by longing S&P and selling TOPIX futures…

Can someone please explain the intuition behind this? Why are you selling TOPIX? Is it because the investor is also going long the Japaense manager alpha portfolio then selling TOPIX to get rid of the Japanese systematic risk? That is not clear.

Appreciate your time and help! Thanks.

#2

Correct, and I agree that it is not 100% clear.

#3

I have studied portable alpha in my M.Sc. and it’s basically: 1) Long manager (Long Alpha X & Beta X) 2) Short index of the manager (Short Beta X) 3) Long another index (Long Beta Y) At the end you are : Long Alpha X & Long Beta Y So, you have no systematic risk from the manager and you get his alpha and you are exposed to the beta of another index. That’s why the alpha is portable.

#4

thanks guys!