"You've got to expect this sort of evolution," notes David Katz, a partner at Rocaton Investment Advisors, a Norwalk, Connecticutbased consulting firm. Asset managers hope that these off-the-shelf portable alpha strategies will appeal to pension plans that are either too small to justify the costs of a custom-made program or lack the expertise to confidently deploy the strategy.ĭavid Saunders, a principal at $3.5 billion fund-of-hedge-funds manager K2 Advisors in Stamford, Connecticut, reports that his firm is working on two prepackaged portable alpha offerings, one with traditional hedge fund alphas, and one that uses active currency management to add value. Here the money manager creates the beta, supplies the alpha (or outsources the job to another asset manager) and handles all the investing mechanics. Some money managers, including Putnam Investments, now plan to prepackage their portable alpha strategies into conventional commingled funds. The program is structured to dovetail with the existing portfolio. The sponsor also selects alpha that complements the returns of the plan's other assets, then hires and monitors the best managers it can find, judging them on the relative volatility of their returns as well as on how the managers correlate both to their markets and to each other. The plan sponsor establishes the market exposure through index futures or swaps, maintains the contracts and replaces them as they expire. Traditionally, institutional investors have custom-designed their own portable alpha strategies, usually with the help of a specialist consultant or money manager. And it must be pure: For alpha to be completely separate from beta, as the strategy demands, the hedge fund manager must carry no beta exposure at all. Then it would use the remaining $95 million of plan assets to invest in, say, a fund of hedge funds that aims to deliver pure alpha.
A pension fund might get beta exposure on $100 million of equities, for example, by using $5 million to buy swaps or futures that deliver the gain or loss on an equity portfolio several times that amount. In a portable alpha strategy, an investor makes separate investments in alpha and beta, using a combination of passive approaches - market exposure from index funds, futures or swaps - and high-alpha products like hedge funds. With investors looking to separate their alpha and beta bets, portable alpha strategies are becoming a favorite of the pension crowd - and money managers are trying to develop new products to meet the growing demand.
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