Institutional investors are expanding their portable alpha programs in hopes of beefing up anemic stock and bond returns.
While the virtues of portable alpha have been preached for years, it's only since investors woke up to the harsh new realities of lower expected returns that they've been pursuing these strategies in earnest.
In these strategies, investors try to find consistent sources of alpha — the risk-adjusted return above a set benchmark. They short out the market exposure of the alpha source, and then port the alpha onto a readily available market exposure, or beta, usually through a derivatives contract.
For example, a pension executive might believe a small-cap equity manager can produce alpha while large-cap equity managers cannot because pricing of large-cap stocks is very efficient. The fund would hire the small-cap manager, short the Russell 2000 index, and then port the alpha onto a Standard & Poor's 500 index strategy, such as an exchange-traded contract, a futures contract or a swap.
Among those building up their portable alpha programs:
• International Paper Co., Stamford, Conn., whose $6.6 billion pension fund plans to expand its $330 million program, said Robert Hunkeler, vice president for investments;
• The $1.4 billion Wisconsin Alumni Research Foundation, Madison, which is in the process of developing separate portfolios of alpha sources and beta sources, said Tom Weaver, director of investments;
• Bedrijfstakpensioenfonds Metalektro, Schipol, Netherlands, which plans to increase the portion of its risk budget dedicated to portable alpha to 30 to 40 basis points on the entire €16 billion ($19.5 billion) pension fund, up from 10 to 15 basis points now, said Paul van Gent, portfolio manager.
• The $3.1 billion University of Virginia endowment, which plans to use portable alpha strategies as a way to keep beta exposures in line with the fund's newly revised investment policy while seeking to maximize alpha, said Christopher Brightman, chief executive officer for the University of Virginia Investment Management Co., Charlottesville, Va.