Portable Alpha Theory and Practice : What Investors Really Need to Know

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2008-04-04
  • Publisher: Wiley
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As an original innovator of the portable alpha concept, PIMCO has been managing an increasing number of different portable alpha strategies for investors since 1986. And now, with Portable Alpha Theory and Practice, the PIMCO team shares their extensive experiences with you. Filled with in-depth insights and expert guidance, this reliable resource provides an informative look at portable alpha and key related concepts, as well as detailed discussion on the many ways it can be applied in real-world situations.

Author Biography

Sabrina C. Callin, CFA, CPA, is an Executive Vice President and head of the StocksPLUS product management team responsible for PIMCO's global portable alpha–based equity business. Ms. Callin is joined in authoring this book by a number of colleagues with deep expertise in key areas associated with the portable alpha investment application, and who have, on average, more than eighteen years of investment experience. PIMCO currently manages over $55 billion in integrated portable alpha strategies and is generally credited with being an original innovator of the concept.

Table of Contents

Forewordp. ix
Prefacep. xi
Acknowledgmentsp. xv
Overview of Book and Key Conceptsp. 1
Borrowing to Achieve Higher Returnsp. 3
Leverage-The Good, the Bad, and the Uglyp. 4
The Confusion Surrounding Alpha and Betap. 7
Portable Alpha Definitions and Trendsp. 9
Back to the Basics: Investments 101p. 10
Asset Allocation and Portable Alphap. 10
Alpha, Beta, and Alpha-Beta Separationp. 11
Global Sources of Portable Alpha, Associated Risks, and Active Managementp. 11
Derivatives-Based Beta Managementp. 12
Portable Alpha Implementationp. 13
The Real Holy Grail: Risk Measurement and Managementp. 13
Liability-Driven Investingp. 14
Portable Alpha Theory and Practice: Wrapping It Upp. 14
Portable Alpha Definitions and Trendsp. 15
The Value of and Components to Porting Alphap. 16
The Derivatives-Based Market Exposure (Beta)p. 20
The Alpha Strategyp. 21
Common Misperceptionsp. 22
The Evolution of Portable Alphap. 24
A New Paradigm?p. 28
The Importance of Return-And Riskp. 30
Conclusionp. 38
Back to the Basics: Investments 101p. 39
The Optimal Investment Portfoliop. 40
Utility Functions and Risk Aversionp. 41
Portfolio Selection and the Efficient Frontierp. 42
The Capital Market Linep. 45
CAPM and Factor Modelsp. 47
The Benefits of Diversificationp. 48
Risk Premiumsp. 49
Theory versus Realityp. 51
Conclusionp. 57
Option Pricingp. 58
Merger Arbitrage Examplep. 61
Asset Allocation and Portable Alphap. 65
A World of Lower Returnsp. 66
The Classic Model for Portfolio Constructionp. 69
Challenges with the Classic Modelp. 70
Portable Alpha, Level Onep. 71
Portable Alpha, Level Twop. 73
Pitfalls of Portingp. 75
Risk Budgeting: An Imprecise Sciencep. 77
Sustainable Spending in a Lower-Return Worldp. 79
The Constituent Parts of a Spending Policyp. 80
The Risk Premium and the Building Blocks of Returnp. 81
The Role of Alpha in Setting Expectationsp. 81
Contributionsp. 82
The Implications of a Slender Risk Premiump. 83
Stocks for the Long Run?p. 84
Dividends and a Slender Risk Premiump. 86
Benchmarking at the Portfolio Levelp. 87
In Search of a Better Risk Measurep. 88
What Is Success?p. 90
Conclusionp. 93
Alpha, Beta, and Alpha-Beta Separationp. 95
Beta and Alpha Definedp. 96
CAPM, Alpha, and Betap. 97
Alpha and Beta in a Portfolio Evaluation Contextp. 98
The Relevance of Alpha versus Excess Returnp. 100
Key Challenges of Alpha-Beta Separation and Estimationp. 101
Alpha Is Not Alpha without Betap. 104
Porting Can Be Costlyp. 105
Is the Alpha Actually Alpha?p. 109
Beta + Beta (+ Beta ...) + Alpha?p. 117
Conclusionp. 126
The Trouble with Alphap. 127
Global Sources of Portable Alpha, Associated Risks, and Active Managementp. 135
Overviewp. 136
The Equity Marketsp. 141
The Fixed-Income Marketsp. 146
Global Diversification and Currencyp. 154
Hedge Funds Strategiesp. 165
Conclusionp. 179
Derivatives-Based Beta Managementp. 183
Securities Lending as a Form of Low-Risk Portable Alphap. 183
Futuresp. 185
Swapsp. 189
Beta Management: Basis Riskp. 192
Examples of Proactive Beta Managementp. 194
Beta Management: Operational Riskp. 198
Recommendationsp. 199
Conclusionp. 201
Portable Alpha Implementationp. 203
The Alpha Strategyp. 204
The Derivatives-Based Market Exposure (Beta)p. 205
Liquidity for Margin or Collateral Callsp. 205
Consolidated Risk Management, Monitoring, and Reportingp. 211
Integrated Approachesp. 214
Segregated Approachesp. 215
Semibundled Approachesp. 216
Comparing and Contrasting Different Approachesp. 218
Implementation Costsp. 219
Evaluating Portable Alpha Implementation Approachesp. 220
Conclusionp. 221
Segregated Portable Alpha Case Studyp. 221
The Real Holy Grail: Risk Measurement and Managementp. 225
Identifying Risks: Alpha, Beta, and Leveragep. 226
Liquidity and Correlationp. 229
The Consequences of Leveragep. 233
Stress Testing: Measuring Risk in Portable Alphap. 235
History and Time Horizonsp. 240
Conclusionp. 241
Liability-Driven Investingp. 243
What Is LDI?p. 244
Less Room for Complacencyp. 249
Examining the Liabilitiesp. 252
Liability-Driven Investingp. 255
Case Study: Into Phase IIIp. 263
Beyond LDI: Incorporating Factors outside the Pension Planp. 267
Conclusionp. 269
Building Better Betas through Financial Engineeringp. 269
Portable Alpha Theory and Practice: Wrapping It Upp. 273
Ability to Borrow through the Derivatives Market Sets the Stage for Portable Alphap. 274
Central Underpinnings to Modern Portfolio Theory Are Highly Relevantp. 275
Alpha and Beta-It's the Combination That Mattersp. 276
A Wide Variety of Alpha Sources Are Availablep. 278
The Key Is Identification, Measurement, and Diversification of Risk Factorsp. 279
It's Important Not to Lose Sight of the Policy Portfoliop. 280
Prudent Derivatives-Based Beta Management Is Not Freep. 281
Portable Alpha Implementation Can Be Complex and Costlyp. 282
Risk Management Is a Critical Component of Successp. 282
Portable Alpha Is Also Valuable for Investors Focused on LDIp. 284
Portable Alpha Provides Tools for Better Investment Resultsp. 285
Epilogue: Portable Alpha-The Final Chapter: Schemes, Dreams, and Financial Imbalances: "There Must Be More Money"p. 287
Risk Asymmetries: Volatility, Spread, Leveragep. 290
Absolute Return Dynamicsp. 293
The U.S. Current Account Deficit, War, and Hedge Funds: Brieflyp. 295
Public Policy Implicationsp. 297
Conclusionp. 297
Notesp. 299
Bibliographyp. 303
About the Authorsp. 306
Indexp. 311
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