Portable alpha

October 28, 2020

Portable alpha is a mechanism by which investors are able to combine an independent source of manager skill (“alpha”) with an underlying asset class investment (“beta”).

By combining two uncorrelated return streams and utilizing a wider opportunity set for alpha generation, portable alpha represents an efficient approach to adding excess return.  Practically speaking, investors may also view it as a way to add leverage to their portfolio whereby the manager, through a turnkey approach, handles all of the complexities that are inherent with leverage.  Moreover, as expected returns have fallen, portable alpha may potentially allow investors to better meet their return expectations, albeit with caveats. These challenges include increased risk, costs and complexity, identifying and then maintaining “alpha,” the potential misuse of leverage, and understanding the nature of the strategy.