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

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

Sabrina Callin, Bill Gross (Foreword by)

ISBN: 978-1-119-19812-3 September 2015 336 Pages

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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.



Chapter 1. Overview of Book and Key Concepts (By Sabrina Callin).

Borrowing To Achieve Higher Returns.

Leverage – The Good, the Bad, and the Ugly.

The Confusion Surrounding Alpha and Beta.

Portable Alpha Definitions and Trends.

Back to the Basics: Investments 101.

Asset Allocation and Related Concepts.

Alpha, Beta, and Alpha-Beta Separation.

Global Sources of (Portable) Alpha, Associated Risks, and Active Management.

Derivatives-based “Beta” Management, Costs, and Risks.

Elements of and Approaches to Portable Alpha Implementation.

The Real Holy Grail: Risk Measurement and Management.

Liability Driven Investment Applications.


Chapter 2. Portable Alpha Definitions and Trends (By Sabrina Callin).

The Value of and Components to “Porting” Alpha.

The Derivatives-Based Market Exposure (“Beta”).

The Cash Alpha Strategy.

Common Misperceptions.

The Evolution of Portable Alpha.

A New Paradigm?

The Importance of Return – And Risk.

Chapter 3. Back to the Basics: Investments 101 (By Alfred Murata and Sabrina Callin).

The Optimal Investment Portfolio.

Utility Functions and Risk Aversion.

Portfolio Selection and the Efficient Frontier.

The Capital Market Line.

CAPM and Factor Models.

The Benefits of Diversification.

Risk Premiums.

Theory versus Reality.

Summary: It's All About Risk, Return, and Diversification.

Appendix 3.1: Option Pricing.

Appendix 3.2: Merger Arbitrage Example.

Chapter 4. Asset Allocation and Portable Alpha (By Rob Arnott and Brent Harris).

A World of Lower Returns.

The “Classic” Model for Portfolio Construction.

Challenges with the Classic Model.

Portable Alpha, Level One.

Portable Alpha, Level Two.

Pitfalls of Porting.

Risk Management: An Imprecise Science.

Sustainable Spending in a Lower-Return World.

The Constituent Parts of a Spending Policy.

The Risk Premium and the Building Blocks of Return.

The Role of “Alpha” in Setting Expectations.


The Implications of a Slender Risk Premium.

Stocks for the Long-Run?

Dividends and a Slender Risk Premium.

Benchmarking At the Portfolio Level.

In Search of a Better Risk Measure.

What is Success?

Asset Allocation, Redefined.

Chapter 5. Alpha, Beta, and Alpha-Beta Separation (By Sabrina Callin).

Beta and Alpha, Defined.

CAPM, Alpha, and Beta

Alpha and Beta in a Portfoli.o Evaluation Context.

The Relevance of Alpha vs. Excess Return.

Key Challenges of Alpha – Beta Separation and Estimation.

Alpha Is Not Alpha Without Beta.

Porting Can Be Costly.

Is the Alpha Actually Alpha?

Beta + Beta + (+Beta…) + Alpha?


Appendix 5.1: The Trouble with Alpha.

Chapter 6. Global Sources of (Portable) Alpha, Associated Risks, and Active Management (By Sabrina Callin, Alfred Murata, Don Suskind, Steve Jones, Rich Clarida and Lisa Kim).

Part One: Overview.

Part Two: The Equity Markets and Associated Active Management.

Part Three: The Fixed Income Markets and Associated Active Management.

Part Four: Global Diversification and Currency as a Source of Alpha.

Part Five: Hedge Funds as an Alpha Source.

Summary: Evaluating Global Sources of “Portable” Alpha.

Chapter 7. Derivatives Based “Beta” Management (By Jim Keller and Mihir Worah).

Securities Lending as a Form of Low Risk Portable Alpha.



Beta Management: Basis Risk.

Examples of Proactive Beta Management.

Beta Management: Operational Risk.



Chapter 8. Portable Alpha Implementation (By Sabrina Callin).

The Alpha Strategy.

The Derivatives-Based Market Exposure.

Liquidity for Margin or Collateral Calls.

Consolidated Risk Management, Monitoring and Reporting.

Integrated Approaches.

Segregated Approaches.

Semi-Bundled Approaches.

Comparing and Contrasting Different Approaches.

Implementation Costs.

Evaluating Portable Alpha Implementation Approaches.

Appendix 8.1: Unbundled Portable Alpha Case Study.

A Worst Case Scenario.

Chapter 9. The Real Holy Grail: Risk Measurement and Management (By Vineer Bhansali).

Identifying Risks: Alpha, Beta and Leverage.

Liquidity and Correlation.

The Consequences of Leverage.

Stress Testing: Measuring Risk in Portable Alpha.

History and Time Horizons.


Chapter 10. Liability-Driven Investing (By Jim Moore).

What is LDI?

Less Room for Complacency.

Examining the Liabilities.

Liability-Driven Investing.

Case Study - Into Phase III.

Beyond LDI – Incorporating Factors Outside the Pension Plan.

Concluding Remarks.

Appendix 10.1: Building Better Betas through Financial Engineering.

A Further Extension of the Portable Alpha Concept to LDI.

Chapter 11. Portable Alpha Theory and Practice: Wrapping it Up (By Sabrina Callin).

Ability to Borrow through Derivatives Market Set the Stage for Portable Alpha.

Central Underpinnings to Modern Portfolio Theory Highly Relevant.

Alpha and Beta – It’s the Combination that Matters.

A Wide Variety of Alpha Sources Available.

Key is Identification, Measurement and Diversification of Risk Factors.

Important to Not Lose Sight of the Policy Portfolio.

Prudent Derivatives-based Beta Management is Not Free.

Portable Alpha Implementation can be Complex and Costly.

Risk Management is a Critical Component of Success.

Portable Alpha also Highly Relevant in an LDI Context.

Portable Alpha Provides Tools for Better Investment ResultsNotes.


About the Authors.