What is a portable alpha?

Portable Alpha is a strategy in which investors separate the revenues they receive from the total market performance and the revenues they obtain from the selection of shares. It allows them to generate these revenues that combine together in traditional investments from different asset classes. This allows you to finely tuned risk management and easier to evaluate portfolio performance. When the stock price rises, this increase has two components. One of them is the performance of an asset class as a whole called beta. The second is the scale of stock performance in relation to other assets in its class: Alpha. Alpha is important to measure success; If you make a 5 % return on general market investment, your portfolio is good if the market has only increased by 2 percent, but it is bad if the market has risen by 15 percent. It is difficult to calculate the fund's performance compared to the market because the selection of benchmarks significantly affects the alpha. Also if an investor wants to have a relatively more or less exposure to alpha or beta risk nEbo yields requires restructuring its portfolio.

In portable alpha, the investor has one part of the portfolio that generates beta yields that come from actively the timing of the market or passively await an increase in the market on the basis of historical trends. This may include, for example, index futures. Another part of the portfolio is devoted to overcoming the market. The manager combines investments in shares with a derivative investment to eliminate the market risk and thus beta revenues, so that in this part of the portfolio leaves pure alpha risk and revenue.

Creating a net investment Alpha requires comprehensive trading strategy and access to various markets with your own capital and derivatives. The lack of regulation of hedging funds introduced them to the forefront of the portable alpha trading because their managers have the necessary tools to create net alpha investment strategies. However, this also limits portable alpha to those investors with sufficientOut of net assets for investment in hedge funds.

The strategy is called a portable alpha because the section of the net alpha portfolio is separable from the beta section. This means that the investor can leave his original portfolio untouched and add to a clean alpha section known as overlap. Portable Alpha investors often switch their beta investments in lever trading and use the money that is left to invest in pure alpha. In this way, they generate additional revenues without further cash expenses.

Some investors prefer a portable alpha because it allows them to maintain their assets while adjusting the amount of risk to which they are exposed. It also increases portfolio diversification because Alpha and beta are not correlated, so the loss in one area can be canceled by profit in the other. However, the strategy does not always work in practice as it does theoretically. Investments from pure alpha often correlate other classes of assets despite their theoretical independence that candisrupt the portable alpha strategy and cause unexpected losses.