Portable Alpha Theory and PracticeWhat Investors Really Need to Know
Wiley Finance, Band 399 1. Aufl.
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.
Foreword. Preface. Acknowledgments. 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. Summary. 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. Contributions. 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? Conclusion. 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. Futures. Swaps. Beta Management: Basis Risk. Examples of Proactive Beta Management. Beta Management: Operational Risk. Recommendations. Summary. 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. Summary. 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. Bibliography. About the Authors. Index.
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.
While portable alpha strategies have been around for over twenty years, the recent increase in investor risk tolerance and an associated focus on strategies with high return potential, combined with comfort in using derivatives, has contributed to a proliferation of portable alpha strategies and related services. Compared to traditional investment options, many portable alpha structures are considerably more complex—but they can also be very powerful and well worth the extra time and effort involved in understanding them. As an original innovator of the 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 puts portable alpha in perspective from the standpoint of investors. Opening with an informative overview of portable alpha and key related concepts, this book moves on to detail the theory behind this discipline and different ways it can be applied in real-world situations. Chapter by chapter, you'll become familiar with the benefits and costs associated with portable alpha, as well as: The essential aspects of and approaches to its implementation Available global sources of (portable) alpha—from equities and fixed income to hedge funds The increasingly associated topic of liability- driven investing (LDI) Derivatives-based beta management The myths and realities surrounding alpha and beta Related considerations for asset allocation, risk budgeting, and benchmarking The crucial role of risk measurement and management In addition to the overriding themes regarding the link between return and risk, and the benefits of diversification presented throughout the book, there are some additional concepts that are also addressed—including the practice of borrowing to achieve higher returns and the role of leverage as it applies to your investment activities. The idea that portable alpha strategies may provide a solution that enables you to meet or exceed return targets is certainly appealing, as are the potentially powerful diversification benefits. But, as is the case with investing in general, it is important to first develop a comprehensive understanding of the many principles as well as the potential risks that underlie portable alpha strategies—and with this book as your guide, you'll quickly discover how.
Praise for Portable Alpha Theory and Practice "Sabrina Callin and her colleagues have written a concise and engaging book that captures the key values and the pitfalls of what has come to be known as portable alpha. For those who wish to participate in modern finance, this book is a most instructive read." —Alan Greenspan, former Federal Reserve Chairman and President of Greenspan Associates LLC "Modern capital theory argued that (1) risk can be quantified; (2) an asset's risk history gave us useful information about its future; and (3) portfolio risk related in a simple, meaningful way to the risk in its assets. In the new world of porting is modern capital theory obsolete? Read this important book to find out." —Jack L. Treynor, author, Treynor on Institutional Investing "This book is a beautiful combination of theory and practice with due consider-ation of the 'true costs, risks, and skills' necessary to succeed in the use of portable alpha techniques." —Harry Markowitz, Nobel Prize Laureate in Economics, 1990