Portable alpha strategy

A strategy that earns you an uncorrelated yield pick-up, over and above the returns of an underlying portfolio.

Sophisticated institutional investors are increasingly turning to strategies like “portable alpha” as a way to add outperformance to portfolios across different markets or asset classes, in an efficient and low-cost way.

Vanilla derivative strategies have traditionally been employed as overlays to basic portfolio construction for these purposes, and a portable alpha strategy now wraps derivatives and alternative alpha funds into a particularly elegant structure that allows institutional fund managers to be more flexible in their exposures, without deviating from their mandates or losing the economic benefit of their main underlying portfolios.

For example, a fund may have a mandate to invest predominantly in equities or similar securities. By replicating an index return (or basket) via a total return swap, and then adding exposure to a credit or money market fund using the residual cash released (achieved by the unfunded exposure to the equity component, using the swap), the fund can lift the overall return above the beta of the equity performance, thanks to the extra pick-up. This is all achieved without having to sell down the original exposure to the chosen underlying equity portfolio. Additionally, in the case of institutions with multi-asset mandates, funds may be kept inhouse and redeployed across existing funds. The benefit is a hybrid performance of credit or money market alpha, over and above the beta of the original equity strategy.

The strategy essentially involves porting capital that’s released by replicating an Index or Basket of shares through a total return swap or similar synthetic and unfunded strategies. With cash rates as low as they currently are, the strategy is currently making for better returns in multi-asset portfolios.

The capital is released back into the client’s related funds – credit or money market funds that earn mandates in excess of cash rates. The structure thus takes advantage of the relatively low cash rates in the market at the moment, enhancing returns over and above equity thanks to the imported credit uplift.

Investec’s Portable Alpha Note offers a fully funded packaged solution, negating the need for our clients to manage the admin and margining that is traditionally involved with implementing this strategy.

To find out more about Investec’s portable alpha and other related strategies: