Portable Alpha Revival: A Solution to the Beta/Alpha Mismatch

What You Need to Know

Investors face a new regime, with heightened geopolitical risks and beta sources expected to deliver lower returns than they have in years past. At the same time, market concentration still poses a challenge for active managers seeking to enhance those betas. We don’t think investors should by any means write off active management, but they’ll need to think differently about how to integrate it into their portfolios.

Doing this requires addressing a mismatch between desired portfolio beta exposures and the most fruitful alpha sources. Alpha potential is alive and well in less-efficient and less-exploited market segments, such as small-cap and emerging-market (EM) equities, but few investors are willing to budget substantial beta to those areas. Multi-manager hedge funds also seem like effective alpha generators, but how can investors connect their beta and alpha worlds efficiently?

We think one answer lies in a strategy familiar to many investors yet more refined than the version from decades ago: portable alpha. This solution can efficiently tap into a wide range of attractive alpha streams with capital efficiency while keeping strategic asset allocations on track. If investors implement and govern portable alpha correctly, it may be a powerful tool.