Bk 3, LOS 23t, Pg153,
Can anyone please explain me the difference between portable alpha strategy and alpha beta separation approach.
I find it confusing.
Alpha and beta on a standalone is clear to me, but not in understanding as t how portable alpha strategy is different.
I believe that portable alpha could be part of an alpha beta separation strategy. Basically, a b separation means that for a given investment strategy, you have management of the market mimicking portfolio and the management of attempt to gain alpha done by two different teams or ppl. For portable alpha, you identify an alpha producing manager and then find a strategy to hedge/negate his beta or market portion of his returns, usually by shorting the futures of his specific benchmark index. Then go long the futures index you are benchmarked against. You now have their returns from alpha but not their index and returns from your benchmark index.
What I think is that in alpha beta separation you have systematic (beta) exposure in one market (eg through futures) and unsystematic (alpha) exposure in another market (throught long-short ie. pairs trading). In portable alpha you, again, have systematic (beta) exposure in one market, but portable alpha part can bring both alpha from another market (eg throght active stock selection) and also beta because active stock selection does not mean equity neutral here (ie. can take for instance only long positions). So you can end up having 2 beta exposures and 1 alpha exposure.
Alpha-beta sep ratio is I guess an investing strategy. Portable alpha is also a strategy where you outsource your alpha manager
On page 206 in the curriculum, it says that a market neutral long short portfolio can be equitized by holding a permanent stock index futures position (rolling over contracts), giving the portfolio full stock market exposure at all times.
In a market neutral L/S strategy you have two alphas and no beta. You should be earning the risk free rate from the cash position on the shorts, which you use to go long a futures contract which would be the “portable” alpha.
Portable alpha = you earn alpha in the market you are familiar with (X) and can still have exposure to market (Y) by beta.
Alpha Beta Seperation is an active management approach. It is the general term for the idea of bulding a portfolio using multiple managers that seperates your alpha component and your beta component----Not a specific strategy but the broad category.
Portable Alpha is an example of how to accomplish Alpha Beta Seperation. More like the specific strategy within that category. Isolating your alpha and adding it to a systematic risk exposure.