Portable alpha welcomed back into institutional investor arsenal

The appetite for ‘portable alpha’ has officially returned 17 years after the global financial crisis (GFC) and is now readily accessible to more institutional investors than ever, according to a new research paper from investment consultant, bfinance.

The paper found portable alpha is now being increasingly leveraged by investors to boost returns from liquid assets without affecting strategic beta exposures. It also said if all portable alpha strategies both developed or proposed by investment managers were available to market, its current “visible universe” would grow by four times.

“We’re seeing a strong acceleration in appetite for portable alpha, and importantly, that demand is being met with supply-side innovation,” Toby Goodworth, report co-author and Managing Director and Head of Liquid Markets at bfinance, said.

“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.”

Goodworth said in the paper that portable alpha’s resurgences comes after a mass fallout from the 2008 crisis, which highlighted the “risks of getting portable alpha wrong: correlated losses in both alpha and beta exposures, liquidity mismatches and leverage combined to unseat many funds”.

However, Goodworth suggested managers and investors have learnt from their mistakes and have created an investment landscape more conducive to strong portable alpha performance – with the necessary guardrails in place.

“The current landscape is characterised by liquid strategies with tight risk management philosophies,” the paper said.

“Moreover, accessibility has improved: fund managers have sought to draw smaller institutional investors and wealth management clients to the sector with portable alpha share classes of flagship hedge funds or dedicated commingled funds that offer ‘single-line-item’ implementation.”

This ‘democratisation’ of portable alpha has seen appetite surge among investors and managers scramble to meet the heightened demand, even offering ‘turnkey structures’ including portable alpha share classes or other dedicated funds. These streamlined formats have also reduced the complexity and collateral management required by the investor.

“One of the most interesting developments is how much more accessible portable alpha has become,” Chris Stevens, report co-author and Senior Director, Diversifying Strategies at bfinance, said.

“Where this approach was once a niche option, we’re now seeing scalable, off-the-shelf offerings that suit a much broader range of institutions.”