Is there a good resource to really thoroughly learn about the various portable alpha strategies out there, what they are, who they are offered by, the mechanics, historical performance, new ideas, direction the industry is moving in etc. Thank you in advance.
portable alpha is going to be all but dead very soon. If you had say a portable alpha product with S&P derivatives, depending on leverage, you would be hurting pretty bad! No one wants it anymore, well thats my opinion.
If i am a pension plan and want to invest a large portion of my portfolio in long duration bonds so as to match the duration of liabilities, i would port alpha via overlay to get the return for my plan.
Usually for PA you have an “alpha generator” so lets say Hedge Fund A, you then add to that usually via derivatives a SWAP on say Barclays Cap Aggregate Index (for bonds) to get your Beta exposure. So now, BC Agg was up 5% last year, and lets say HF A was down 20% and you hedged 80% exposure, so your PA is now down close to 10% for the year. That sucks! If this was an equity swap you would most likely be down around 50% or more. This is just one type of PA but you get the idea.
my understanding of portable alpha comes down to beating your costing of funding on a future. if you buy a S&P 500 future your implied funding/risk free rate is libor (at days to the next future contract). if you can beat libor by going farther out the curve you are earning the return on the future + bond portfolio return - libor. i think pimco does this and it is called stocks plus. with the libor curve being steep 1M = .52% 1YR = 2.01% i think it is a pretty good move. i dont think you will need to worry about the fed rising rates any time soon so you can just play the roll.
portable alpha comes down to finding alpha…comes down to beta…beta is not that cool of a concept. volatility=risk? wtf?
Its popular with long-only mandates that are tied to a benchmark, ie S&P, who want to get more “alpha” so they sell an S&P futures and take that money and invest it in an alpha generator (Hedge Fund) to get the alpha they were looking for. Yes its much more complicated than that, but I’m not diving into it on a forum. Bchad is good for long explanations, that’s not how I roll.
any good reading material on the web?
quick and dirty: www.watsonwyatt.com/us/research/webconferences/wic4/presentation.pdf
There was a paper I read a couple months ago (not sure of location) about a strategy that would combine several different strategies into a portable alpha approach. For example, it would combine a synthetic merger arb, long value/short growth, long small/short big, etc etc into one portfolio (I think like 5-10 different strategies) and use that as portable alpha. It had pretty good returns for the volatility, but still would have had a big drawdown in late 2008.
The tough part too is that when you have as volatile year as last year, you probably would have wiped out your investment also, just meeting SWAP payments! Portable Alpha is a bull market strategy…
jmh530 Wrote: ------------------------------------------------------- > There was a paper I read a couple months ago (not > sure of location) about a strategy that would > combine several different strategies into a > portable alpha approach. For example, it would > combine a synthetic merger arb, long value/short > growth, long small/short big, etc etc into one > portfolio (I think like 5-10 different strategies) > and use that as portable alpha. It had pretty good > returns for the volatility, but still would have > had a big drawdown in late 2008. i wish i you can remember more because this is primarily what i am trying to locate.
also, this is a stupid question but when they say they overlay alpha, what does that mean? does that mean that they sue futures and swaps to add alpah to the portfolio?
did you just read a Bridgewater piece or something?
bigwilly Wrote: ------------------------------------------------------- > Portable Alpha is a bull *sh@t* strategy… Made an edit.
if you are gonna be anal then the right statement is: alpha is a myth. however, i am very inteersted in the construction of this strategy as part of an interview.
needhelp Wrote: ------------------------------------------------------- > also, this is a stupid question but when they say > they overlay alpha, what does that mean? does that > mean that they sue futures and swaps to add alpah > to the portfolio? overlaying alpha just means to add alpha of one asset class to what you normally wouldn’t add to. for example, porting the alpha of small cap equity onto the beta of long-duration bonds. so in order to do this (and i’m simplifying for illustration) is to short futures contract on the Russell 2000 Index while invest in a high IR small cap manager (say, Copper Rock) and invest in a long-duration bond index. so effectively, in theory, you’ll get the beta exposure of long bonds coupled with the potential alpha generation within the small cap space.
btw, i stumbled upon some good resources on couple of papers on this topic. i forgot which manager came by one day to discuss their PA strategy to us. i’ll let you know if i find anything.
Basically they use a future to replicate holding the index. That uses 5% of the portfolio for margin, leaving the 95% remaining as Treasuries/Cash. You then invest the 95% in whatever alpha generating activity you think adds alpha (though it would be sensible to leave a little in cash in case there’s a margin call). The trick is: 1) Make sure that whatever alpha you want is really uncorrelated with Beta, or else you are adding substantial risk. 2) If you are using more than one alpha source, you want to make sure those sources are also reasonably uncorrelated with each other.
a good article on portable alpha http://www.euromoney-yearbooks.com/images/143/downloads/MORGANSTANLEY1FINAL.pdf