Morgan Stanley AIP Portable Alpha

Alpha First, Then Beta
Portable alpha strategies are designed to increase the expected generation of alpha (excess return over a benchmark), regardless of asset class, while maintaining the desired strategic asset allocation to traditional beta (market) exposures.  This approach allows investors to increase their allocations to high-alpha strategies like hedge funds and private equity investments, while maintaining their aggregate equity and fixed income targets.

Traditional equity and fixed income markets are highly efficient, and therefore, the potential to generate alpha is constrained.  Portable alpha allows investors to invest with managers in less efficient markets and with more tools (e.g., shorting and leverage) in order to generate higher levels of alpha.

Our Approach
Our approach to portable alpha begins by constructing a portfolio of alternative strategies and managers that we believe will generate significant amounts of alpha on average over time, with minimal volatility and embedded beta exposures.  The choice of alpha managers is broad and can include hedge funds,  private equity and opportunistic real estate funds.  Alpha managers often have very low correlations with each other, so a portfolio of multiple funds provides opportunity for greater efficiency and risk management.

Beta Exposures
With the alpha managers in place, the next step is to estimate the beta exposures embedded in the alpha portfolio.  We then add (or subtract) beta exposures as needed to obtain aggregate exposures required by our clients, normally through an overlay using swaps, options or futures.  Most beta exposures are inexpensive and fairly simple to access.  Ongoing monitoring and rebalancing of the overlay is necessary to maintain the desired beta exposures.

Flexible Financial Engineering
Portable alpha is an extremely flexible type of financial engineering, with a large number of possible applications and structures.  This approach allows alpha to be transported to any market index for which well-functioning derivatives markets exist, to any asset class that can be replicated closely using baskets of securities or as an enhancement to existing passive or active managers.  These advantages make portable alpha an optimal solution for investors looking to enhance existing long-only asset classes with alpha generating strategies—all without changing their asset allocation.