Portable alpha is regaining traction from investors and wealth managers navigating macro-influenced markets which have reduced the efficacy of traditional beta exposures.
An experienced player in the space, AMP Investments has utilised portable alpha strategies within its global enhanced index fund for over 20 years by investing in the Henderson multi-strategy hedge fund which ports its alpha over MSCI World.
Now the firm is preparing to seed a new portable alpha strategy for its geared Australian equity fund, in partnership with a long-term incumbent alternative manager it did not name.
Speaking to InvestorDaily, head of public markets at the fund manager, Duy To, said the portable alpha strategy AMP currently offers “not only enhances returns with high efficiency but is also uncorrelated with traditional quantitative strategies typical of the enhanced index space”.
“Similarly, in our geared Australian Shares fund, the portable alpha strategy we are exploring provides a source of returns that is uncorrelated, particularly during periods of extreme market volatility when traditional stock selection approaches typically underperform and become highly correlated,” To said.
The fund manager attributed the increased appeal of portable alpha in the current climate to three main factors.
First, he said, the prevalence of “narrow macro-driven markets”, a trend he expects to persist, has complicated traditional active stock selection since good timing now matters more than picking individual winners.
“Secondly, the market volatility experienced on ‘Liberation Day’ highlighted the limitations of traditional stock selection approaches in providing sufficient diversification when it is most needed,” To said.
“Lastly, fees for portable alpha strategies have become more competitive as demand for traditional alternative alpha and hedge funds has declined under the APT benchmarking framework.”
At the same time, while portable alpha strategies are typically viewed as more effective during times of market volatility, To emphasised that not all portable alpha strategies are created equal.
“Typically, during such volatility, active strategies across various asset classes tend to correlate closely and underperform. Additionally, the use of leverage in these portable alpha strategies can impact their performance if deleveraging becomes necessary,” he said.
However, To still cautioned that while portable alpha strategies are becoming a more attractive option, funds must not forget the risks that led others to abandon them in the past. The most notable case of this was during the Global Financial Crisis that highlighted the vulnerabilities of these strategies primarily due to correlations spiking unexpectedly and liquidity drying up.
He emphasised that the primary hurdle to portable alpha is its inherent complexity and the steep learning curve these strategies present to investors.
“This can be challenging for governance decision-making committees and affect client perceptions,” To said, adding that AMP’s long-standing experience in global equities helps mitigate this risk.
Overall, he said investors must carefully weigh potential upsides against risks when looking into such strategies. “Being highly selective and using portable alpha as a lever for portfolio construction is key,” he said.
Research released by bfinance earlier this year revealed that institutional investors have taken to portable alpha to enhance returns and improve capital efficiency without disrupting core market exposures.
One of the most interesting developments cited by the firm is the rise in “scalable, off-the-shelf offerings” that suit a much broader range of wealth managers and institutions, which has essentially resulted in democratisation of the portfolio construction tool.
“We’re seeing a strong acceleration in appetite for portable alpha, and importantly, that demand is being met with supply-side innovation,” Toby Goodworth, managing director and head of liquid markets, said at the time.
“As investors face mounting pressure to make liquid assets work harder, these solutions provide an efficient route to incorporate uncorrelated alpha without compromising on core exposures.”
