Usage of A Portable Alpha Manager
Institutional investors typically make use of this type of investment management as an addition to their portfolio. They gain exposure to a portfolio of their desired markets through use of passive investments, and use Leverage against this portfolio to invest in the portable alpha manager. As long as the manager returns enough alpha to cover their costs of investing (interest and fees), the investor can port the excess return to his portfolio.
Because market risk is eliminated, an investor might be convinced to invest in asset classes that he may not otherwise wish to invest in, as long as the investor has confidence in the skill of the investment manager. For example, a hospital endowment's investment policy might prohibit investment in commodities, but the board might be convinced that they can circumvent this policy for a portable alpha manager who invests in commodities, because he hedges out his exposure to the commodities market.
Another method is via a so called 130/30 strategy. The idea is relatively simple: the manager shorts some fixed percentage of the portfolio (in this case, 30%), and uses the proceeds for further purchases. The purchase of additional assets with the full capital from the short sale is made possible by what is called an enhanced prime brokerage structure. This raises the long portion of the portfolio to 130% of the original investment capital. The net effect of this strategy is to separate the portfolio into two portions: the first portion is long only, yielding beta returns; the second is long/short and market neutral, yielding alpha returns. The strategy allows managers to bet against specific stocks they believe to be over-valued, rather than being restricted only to stocks they believe will increase in value (as is the case in a long-only portfolio). For example, investment bank Goldman Sachs Asset Management’s model global long-only portfolio invests in around 200 stocks; by comparison its Global Flex model portfolio (following a 130/30 strategy) invests in approximately 250 stocks and shorts about 100 – giving a total of some 350 names.
Read more about this topic: Portable Alpha
Famous quotes containing the words usage of a, usage of, usage, portable, alpha and/or manager:
“Pythagoras, Locke, Socrates—but pages
Might be filled up, as vainly as before,
With the sad usage of all sorts of sages,
Who in his life-time, each was deemed a bore!
The loftiest minds outrun their tardy ages.”
—George Gordon Noel Byron (1788–1824)
“I am using it [the word ‘perceive’] here in such a way that to say of an object that it is perceived does not entail saying that it exists in any sense at all. And this is a perfectly correct and familiar usage of the word.”
—A.J. (Alfred Jules)
“...Often the accurate answer to a usage question begins, “It depends.” And what it depends on most often is where you are, who you are, who your listeners or readers are, and what your purpose in speaking or writing is.”
—Kenneth G. Wilson (b. 1923)
“In the quilts I had found good objects—hospitable, warm, with soft edges yet resistant, with boundaries yet suggesting a continuous safe expanse, a field that could be bundled, a bundle that could be unfurled, portable equipment, light, washable, long-lasting, colorful, versatile, functional and ornamental, private and universal, mine and thine.”
—Radka Donnell-Vogt, U.S. quiltmaker. As quoted in Lives and Works, by Lynn F. Miller and Sally S. Swenson (1981)
“Imagination is a valuable asset in business and she has a sister, Understanding, who also serves. Together they make a splendid team and business problems dissolve and the impossible is accomplished by their ministrations.... Imagination concerning the world’s wants and the individual’s needs should be the Alpha and Omega of self-education.”
—Alice Foote MacDougall (1867–1945)
“I knew a gentleman who was so good a manager of his time that he would not even lose that small portion of it which the calls of nature obliged him to pass in the necessary-house, but gradually went through all the Latin poets in those moments. He bought, for example, a common edition of Horace, of which he tore off gradually a couple of pages, read them first, and then sent them down as a sacrifice to Cloacina: this was so much time fairly gained.”
—Philip Dormer Stanhope, 4th Earl Chesterfield (1694–1773)