An Overview of 'Portable Alpha' Strategies, with Practical Guidance for Fiduciaries and Some Comments on the Prudent Investor Rule

University of Queensland Law School Working Paper

22 Pages Posted: 6 Jun 2001

See all articles by Paul Ali

Paul Ali

University of Melbourne - Law School; Centre for International Finance and Regulation (CIFR)

Martin L. Gold

Sydney Business School, University of Wollongong

Multiple version iconThere are 2 versions of this paper

Date Written: May 2001

Abstract

This article discusses an innovative enhanced indexing strategy known as "portable alpha". A portable alpha strategy, in essence, involves overlaying the return from an external fund or internal strategy that has consistently generated alpha with a derivatives-created index exposure. A number of major fund managers in the United States and the United Kingdom have recently launched funds incorporating portable alpha strategies. Steps are also being taken to launch similar products in Australia.

The article also considers: the economic rationale for portable alpha strategies; the differences between conventional indexing and enhanced indexing strategies, on the one hand, and portable alpha strategies, on the other; the principal sources of alpha for portable alpha strategies in the United States, United Kingdom and Australia; and the different methods for implementing portable alpha strategies.

In addition, the article examines the key issues under Australian law confronting fund managers, pension trustees and other fiduciaries who are considering portable alpha strategies. A typical portable alpha strategy comprises two elements -- investing in a discrete source of alpha or implementing an alpha-generating strategy and overlaying that investment with synthetic exposure to an index created by transacting derivatives. Thus, a fiduciary must, first, have the legal capacity authority to invest in the source of alpha and enter into the derivatives. Secondly, the adoption of the portable alpha strategy must be consistent with the duty imposed on fiduciaries, by Australian law, to act prudently when investing the assets entrusted to them.

Keywords: Portable Alpha Strategies, Indexing, Mutual Funds, Hedge Funds, Prudent Investor Rule

JEL Classification: G23, K22

Suggested Citation

Ali, Paul and Gold, Martin Lionel, An Overview of 'Portable Alpha' Strategies, with Practical Guidance for Fiduciaries and Some Comments on the Prudent Investor Rule (May 2001). University of Queensland Law School Working Paper. Available at SSRN: https://ssrn.com/abstract=271858 or http://dx.doi.org/10.2139/ssrn.271858

Paul Ali (Contact Author)

University of Melbourne - Law School ( email )

University Square
185 Pelham Street, Carlton
Victoria, Victoria 3010
Australia
+61 3 8344 1088 (Phone)
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HOME PAGE: http://www.law.unimelb.edu.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
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Sydney, NSW 2000
Australia

Martin Lionel Gold

Sydney Business School, University of Wollongong ( email )

Level 18, Gateway Building
I Macquarie Place
Sydney, New South Wales 2000
Australia
+61 2 9266 1300 (Phone)

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