Faced with higher rates and a daunting fundraising climate, hedge funds are wooing investors with a seemingly antithetical pitch: index investing with a twist.
Hedge fund industry insiders are abuzz right now about “portable alpha,” a blast-from-the-past strategy that’s undergoing a revival.
Portable-alpha strategies, historically popular among large pension funds, seek to accomplish the mission of beating the market in part by being the market. They capture exposure to a target benchmark, like the S&P 500 or the MSCI World, and then supercharge it with actively managed alpha, often from an asset manager or hedge fund — whether that’s systematic equities, Commodity Trading Advisors, relative value, or a multistrategy mélange.
The end result, if all goes well: You reap the performance of your benchmark index and get a healthy chunk of uncorrelated returns layered on top without materially increasing your risk and expenses.
“Your goal is to get punchier returns in a higher-rate environment,” Kim Shaw, global cohead of prime brokerage at Morgan Stanley, said in an interview.
So-called because you can customize the type of active strategy to package with a given index or ETF exposure, “portable alpha” has been embraced by funds including Balyasny, Man Group, Squarepoint, and Winton, according to people familiar with the firms, and a litany of others are exploring it in conversations with investors.
There’s been a steady drumbeat of intrigue about the strategy this year, Shaw and her global cohead Penny Novick told Business Insider — a sentiment echoed by other prime brokers, hedge fund managers, and industry consultants.
“It’s natural given the challenging capital-raising environment that hedge funds are more willing to innovate and figure out what they can repackage and offer that’s differentiated given the pressure that higher rates are putting on institutional allocators — it’s supply and demand,” Shaw said.
There isn’t much hard data yet on the prevalence and adoption of such strategies at hedge funds, but after noticing an uptick in inquiries from clients, Morgan Stanley’s prime brokerage team put out a portable-alpha white paper in May. The topic, which the firm expects will remain a top theme going forward, was on the agenda at the capital introduction conference for fund managers and allocators the bank hosted on July 31.
“People want to get educated around it. And there are different ways you can actually execute the strategy — it’s not like there’s one cookie-cutter approach,” Novick said.
One exec at a large multistrategy hedge fund said his firm is developing portable-alpha offerings to investors.
“This is a structural development that will have massive impacts on the hedge fund business,” the exec said, asking to remain anonymous since the firm’s plans aren’t public.
He cut the conversation short, noting that he had four calls that day on portable alpha.
A strategy born in the 1980s to beat the S&P 500
Like most trends in hedge fund…
Read More: Hedge Funds Revive ‘Portable Alpha’ Strategy to Woo Investors
