A diversified investment strategy that seeks to juice returns through leverage is finding new love among big money managers — more than a decade after it blew up during the 2008 financial crisis.
The approach, widely known as “portable alpha,” uses derivatives to track returns of long-only indexes and then invests the excess cash in trades beloved by hedge funds, including the likes of trend following or market-neutral equity strategies.
Some 22% of institutional investors, private banks and family offices adopted the investing style as a form of asset allocation last year, according to Barclays Plc.’s annual survey tracking 325 investors with $8.6 trillion in total assets. That’s up from 10% the previous year.
The spike in interest comes as active managers struggle to beat a runaway stock bull market, while angst grows about potentially below-average returns ahead given stretched valuations. Catering to the demand are hedge-fund firms like AQR Capital Management, which have been rolling out more sophisticated versions of portable-alpha offerings.
“Portable alpha is growing in popularity because investors are able to access market returns and combine those with alpha from hedge funds, while primarily only paying fees for the alpha,” said Roark Stahler, US head of strategic consulting in Barclays’ capital solution group. “Thus, it can be a pretty cost effective option for investors.”
Appetite is perking up for an investing style that failed during the global financial crisis, when the diversification value collapsed after assets sold off in tandem and traders weren’t able to exit illiquid positions. Now, advocates say they can make it work this time by improving transparency and liquidity.
The approach has found its way to the world of exchange-traded funds, where Newfound Research and ReSolve Asset Management have launched a slew of ETFs and rebranded them as “return stacking.”
Wall Street banks are also rushing to package portable-alpha trades in swap products that are dubbed as quantitative investment strategies, or QIS.
How to diversify one’s portfolio in the AI-driven era has become a hot topic on Wall Street as stocks like Nvidia Corp. and Microsoft Corp. dominate gains, extending the S&P 500’s decade-long advance that has crushed almost all other major assets. Rather than trimming equity exposure to make room for other allocations, portable alpha allows investors to maximize the upside from stocks — and with a dose of leverage, frees up money to invest elsewhere.
About 75% of the respondents to the Barclays survey said they’re using equity indexes as their beta, or threshold for market returns. For additional gains, or alpha, the majority prefers multi-strategy or equity hedge funds.
The management fee for the alpha side of the program averages 1.4%, with another 17.4% charged on performance, the survey found. The proportion of money managers relying on a third party to generate portable alpha is roughly twice those who do it in-house, according to the survey.
“A number of our clients have recently implemented such strategies,” said Adrien Geliot, chief executive officer of Premialab, which tracks QIS offerings across 18 banks. “It allows precise, systematic exposure management and the flexibility to integrate various strategies to meet a desired risk-return profile.”
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