Portable Alpha

Active investment managers provide two types of return: the return generated from market exposure or “beta ” and the return that comes from selection skill or “alpha.” Active “beta ” returns typically come from market timing. That is, increasing market exposure in up-markets and decreasing it in down-markets. Passive beta returns come from index fund exposure. “Alpha ” comes from security selection within an asset class. As such, the value-added from a true alpha strategy does not depend upon the direction of the market. A true stock-picker, for instance, would have a beta of 1.0 relative to their market benchmark, and all value-added would come from their “active risk ” or stock picking. Portable alpha refers to the process of separating the alpha from the beta and then applying it to other portfolios. Our focus here is to show how investors can obtain portable alphas via traditional long-only strategies and explore the effects of implementing portable alphas in a variety of investment scenarios and provide a discussion of the benefits and drawbacks.