| Investor's mindset ready for the concept of alpha portability |
|
|
| 22/01/2006 | |
|
Given the current turn investment and pension markets are taking, portable alpha strategies, which have been around since the end of the 90s, seem ready to bloom. Many investors would have previously been turned off by either the use of derivatives or absolute return funds involved in the implementation of such a strategy – but there are signs that those fears have been left behind. A series of factors at work lately have been providing a fertile ground for the the concept of portability. Among those factors is the rapid development of new strategic asset allocation approaches that bear similarities or complementarities with alpha portability. "The LDI trend is very strong in Europe, where many funds not only have not only an underfunding problem, but also a liability matching one", says Alistair Lowe, director of global asset allocation at Boston-based State Street Global. He says that given expectations of historically lower bond and equity returns, the ability to add additional return along with a cash-flow matching solutions is increasingly valued by investors. Yet, those strategies that ultimately resemble an enhanced index are fundamentally different, points out Philippe Mimran, the head of balanced funds at Axa Investment Managers in Paris. " You can fill a satellite with a portable alpha strategy, but those two approaches are actually not the same thing. A core satellite strategy does not seek to completely separate the beta from the alpha." And while the separation of beta and alpha requires resorting to either futures or swaps, most investors have long become accustomed to the old derivative scarecrow. By many accounts, derivatives have now become a regular feature of the fund industry. The "mainstreamisation" of derivatives was observed by a survey conducted by the Financial News and the futures and options exchange Eurex. About two-thirds of the investment businesses that took part in the survey say that derivatives now have a role in their investment approach, up from 47% the previous year. Corroborating those results, another survey by JP Morgan AM, which focused exclusively on European and US institutional investors, found that those derivatives are used by 70% and 64% respectively. That bodes rather well for the highly derivative-reliant portable alpha strategy. JPMorgan AM showed that 12% of European investors had already implemented a portable alpha strategy and that a quarter of them were thinking about the implementation of this approach. US investors - which usually include more alternative assets in their portfolios - are much more advanced with regard to this strategy since 22% have already implemented the strategy and 30% are pondering it. Portable alpha assets are expected to grow in line with those assets. According to HedgeWorld, the specialised information service, citing estimates from US consulting firm Casey, Quirk & Associates, the notional value of portable alpha assets is currently US$300 billion, and another US$90 billion should be added over the next 18 months. Absolute Return and Portable Alpha Use amongst European and US investors  Source: JPMorgan Asset Management, survey Europe: 2004, survey US: 2005 In the end, some investors should consider that they are already porting alpha via some of their exposure to structured products "I guess that many institutions are into portable alpha products without actually knowing it", says Philippe Mimran. "That's the case for many investors in structured products that offer a very precise performance spread between different types of assets. But because they are not identified as such, investors just don't know they're doing it." J.L. |
|
Related articles |
|
Articles of the same Topic : Derivatives |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it