Portable alpha strategy

CFA Level III
#1

Can anyone explain the portable alpha strategy. I am not able to understand the concept. Thanks in advance.

#2

It’s a zero-beta strategy that can be added to any portfolio (hence, portable); the objective is to earn positive returns (alpha) with no net market exposure (zero beta).

Wikipedia has an example here.

#3

Thanks S2000 magician.

#4

My pleasure.

#5

This may be the result of over-researching, going beyond CFAI resources, or even the fact that the underlying intent of the following material is marketing, but Pimco has a different version of portable alpha:

https://investments.pimco.com/MarketingPrograms/External%20Documents/Understanding_Portable_Alpha_PU010.pdf

So please confirm whether I have it right:

Portable alpha is gaining alpha from an investment strategy that has low correlation with the source of beta, which would be from taking futures / swaps position in a desired market. Long alpha (active management) and long beta (passive management).

I know S2000 has said a portable alpha strategy means zero beta. Could you guys reconcile?

#6

CFA Institute separates portable alpha from market exposure (beta); hence, alpha and beta separation.

If you have zero correlation with the source of beta, then your beta is zero.

PIMCO’s definition combines portable alpha (per CFA Institute) with target beta exposure. It’s just a different way of packaging the same thing.

#7

I was under the impression that it’s when the beta comes from different assets than alpha.

Say you are Long / Short US equities, that’s the alpha (because 0 beta on US equities).

You decide that you want exposure to european stocks and so buy european stock index futures. That’s the beta.

#8

I think this is more accurate. L/S mkt neutral is a 0 beta strategy that has the ability to earn alpha. Equitizing such a strategy with any passive beta buy going long futures now makes it a portable alpha to use with any beta you like.

#9

Thanks all - I am very clear now.