What Is the Portable Alpha Strategy?

The portable alpha strategy focuses on investing in stocks or other assets that have demonstrated little or no correlation with the markets. To do this, investors separate alpha from beta by investing in securities that are not in the 澳洲幸运5官方开奖结果体彩网:market index from which their beta is derived.

Alpha is the return achieved over and above the market return (or beta) without taking on more risk. Thus, portable alpha is a str♊ategy that involves investing a portion of assets in assets that have little to no correlation with the market.

Understanding Portable Alpha

First, a couple of definitions:

• The alpha of a stock or other asset is its historic return above a wider market index or another industry benchmark that it is compared with.
• The beta of an asset is its volatility or its riskiness compared to a benchmark. It measures the extent to which the price of the asset moves with the market, not independently.

Selecting assets for their beta is a key strategy in portfolio management. These are sometimes referred to as passive returns. A𝓡 stock or fund is selected because its beta indicates it will match the return of the benchmark.

Using Beta

A stock or fund with a beta of 1.0 tends to move up and down with the movement of the market. A fund with a bไeta of 0.5 moves up and down only half as much as the market. One with a beta of 1.5 moves up and down 1🅰.5 times as much as the market.

Therefore, beta can be said to represent passive returns or returns that result from tꦚhe movement of the market as a whole.

Using Alpha

A second type of portfolio returns is known as idiosyncratic. These are returns that are achieved by selection ꧟according to alpha.꧋

That is, the stocks or funds are selected becau꧅se they have a history of outperforming the benchmark. This process is active management, not passive management.

Using Portable Alpha

An investor can achieve portable alpha by investing in securities that are not correlated with the beta. Typically, the🌱 goal with portable alpha is to achieve a higher overall return without endangering the beta, or volatility, of the entire portfolio.

A portable alpha strategy might involve investing one portion of the portfolio in 澳洲幸运5官方开奖结果体彩网:large-cap stocks to get the beta or market return, and another portion in small-cap equitieౠs to achieve alpha.

Since small-cap stocks are more volatile than large-cap sto�♈�cks, the overall beta will then be higher.

To neutralize this higher beta, the small-cap strategy could be hedged with futures on a small-cap index, thereby raising the beta of the overall portfo🍒lio to its original level.

The Bottom Line

A portable alpha strategy seeks to capitalize on the excess returns of certain assets, without adding to the risk of the overall portfolio. In a portable alpha strategy, portfolio managers seek to replicate the beta of a target index, and then increase their gains by adding certain high-alpha securities.