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Financial Engineering: The Evolution of a Profession by Cara M. Marshall, Tanya Beder

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Chapter 27

Portable Alpha

Tanya Beder

Chairman, SBCC Group Inc.

Giovanni Beliossi

FGS Capital LLP

INTRODUCTION

Portable alpha is a form of financial engineering used by institutional investors and others in their portfolios. Portable alpha gained popularity during the late 1990s in the aftermath of the Asian currency, Russian commodity, and the Long-Term Capital Management crises. Market conditions at the time—low volatility, flush liquidity, tight spreads, low risk premiums, and high confidence in the markets—led investors to seek new ways to boost investment returns. Portable alpha was designed to provide that extra return.

Portable alpha was considered by some to be quite a major development, and was grouped along with some of finance's greatest achievements: “Every now and then, there is a development in the world of finance that results in a major paradigm shift. Examples include the introduction of present value as a tool in financial decision making, the Modigliani-Miller hypotheses regarding capital structure and the introduction of modern portfolio theory in investing … [and] the use of various portable alpha financial engineering techniques to raise returns, reduce portfolio volatility, and/or achieve better asset-liability matching.”1

Portable alpha can be structured a number of ways. During its first decade of use, for most institutional investors that embraced it, portable alpha was a success story. This group included well-known asset managers at firms such as Harvard ...

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