Several high-profile hedge funds including Balyasny, Man Group, Winton and Bridgewater Associates are rekindling their interest in portable alpha strategies, which seek to ‘decouple’ alpha from beta to capture market-beating returns, according to a report by Business Insider.
Portable alpha strategies aim to enhance returns by combining market exposure to a benchmark index, such as the S&P 500 or the MSCI World, with actively managed alpha. This active component can come from various sources, including systematic equities, commodity trading advisors, relative value strategies or multi-strategy approaches. The goal is to deliver the performance of the benchmark index with an added layer of uncorrelated returns, all without significantly increasing risk and expenses.
The report quotes Kim Shaw, global co-head of prime brokerage at Morgan Stanley: “Your goal is to get punchier returns in a higher-rate environment. There isn’t much hard data yet on the prevalence of these strategies, but after noticing an uptick in client inquiries, Morgan Stanley’s prime brokerage team released a white paper on portable alpha in May.”
The topic was a focal point at the bank’s capital introduction conference for fund managers and allocators held on 31 July.
The report also cites an unnamed executive at a large multi-strategy hedge fund, in confirming that his firm is developing portable-alpha offerings for investors: “This is a structural development that will have massive impacts on the hedge fund business,” he said, noting a high level of interest and frequent discussions on the topic.
Portable alpha strategies were first popularised in the early 1980s by PIMCO’s Bill Gross and Myron Scholes, who combined S&P 500 index investing with active fixed-income strategies. The strategy evolved to use leverage, allowing funds to buy swaps or futures for benchmark exposure and invest excess cash in market-neutral alpha strategies.
