John At The Center

Overview:

The idea behind portable alpha is that it’s easy to match the market. If you do it using derivatives like futures, you can tie up less cash and get the same return you would using an index fund. Then you can use the rest of your cash to beat the market. The strategy gets its name from the ability to generate alpha, or above-market returns. As long as the returns on the remainder of your cash beat the futures’ cost, you outperform the market. Typically, investors turned to hedge funds that are supposed to beat the market in good times and bad to invest that cash.

Portable alpha was pioneered in the mid- to late 1980s at Pacific Investment Management Co., led by famed bond manager William Gross, and by corporate pension-fund manager Marvin Damsma at Amoco Oil Co., according to the book “Capital Ideas Evolving” by Peter Bernstein.

Criticism:

Use of the aggressive strategy, called “portable alpha,” has been cut in half, with officials of the Pennsylvania State Employees Retirement System acknowledging that the pension fund’s exposure was “too large.”

The blowup is yet another example of the wide-ranging damage caused by sophisticated investment strategies peddled to pension funds and other institutional investors when the stock market was soaring.

http://online.wsj.com/article/SB122809294013867881.html?mod=googlenews_wsj