GLOBAL - Portable alpha strategies are the new paradigm in institutional investment management, according to futures and options exchange Eurex.
Byron Baldwin from Eurex’s business development team told Global Pensions at the 2006 National Association of Pension Funds (NAPF) conference, portable alpha strategies, which enable fund managers to separate alpha from beta and save money on their beta investments while optimising their alpha management, was highly topical at the moment.
“Managers call it the new paradigm in investment management. It has now taken over the way fund managers manage their portfolio,” he said.
The alpha element of the strategy is referred to as portable because they are selected from a wide range of assets regardless of the selected benchmark, with the excess returns ported to the benchmark investment portfolio.
Addressing the NAPF conference held in Edinburgh today, Baldwin said as an uncorrelated asset class, volatility derivatives were an ideal class to include in a portable alpha portfolio.
A previous Merrill Lynch report had shown how volatility derivatives in an equity portfolio could reduce risk and increase return, he said.
Baldwin also commented on a recent Global Pensions article in which AP7 executive vice president Richard Grottheim called for more products to aid the structural separation of alpha and beta.
Grottheim wanted a product that would enable cheap beta production on the passive side, and then on the alpha side a market neutral long-short alpha approach where long decisions were financed by shorting the bad stocks.
Baldwin said this could be achieved by using positions in futures to extract the alpha from the beta, a process he termed “alpha purification”. This would enable the fund manager to then scour the world for optimal alpha return.
“The main thing is that you are getting your benchmark beta return for next to nothing and you as an institutional investor are only paying for alpha. This doesn’t occur under traditional investment management,” he said.
By Lisa Haines
The Co-operative Group's Somerfield Pension Scheme has completed a buy-in with Pension Insurance Corporation (PIC), insuring the benefits of its pensioner members.
Caroline Rookes CBE and Michele Hirons-Wood have joined The Pension Superfund's board of trustees to focus on maintaining governance standards and safeguarding member benefits.
The first specialist independent firm advising pension schemes on bulk annuities or moving to a consolidator has been set up with ambitions to shake up the market.