In the Secret Sauce, the author describes the process of equitizing a long short portfolio. Basically, you add an equity futures position to raise beta from 0 to 1. Makes sense. Later they go into alpha beta separation. You have a long short portfolio in order to generate alpha then you can gain systematic exposure through a futures contract, but it can be any index you want, which introduces portable alpha. Is the only difference between the two the fact you can gain exposure through a multitude of indices in alpha beta separation, while the equitizing approach is limited to an index related to your long/short positions?
I think the difference between the two is that when you equitize you are giving the long-short manager to ability to also earn you beta as well as the alpha that the manager is suppose to have the superior skill in achieving. however, that’s probably going to cost you a bit in fees. so alpha beta seperation you hire a cheap index fund manager to get you your beta while hiring the expensive long-short manager to earn you the alpha.
I was looking into this same exact thing yesterday and here are the notes I put together. Let me know if you agree. Equitizing Cash: You are long/short two different stocks in same industry, so you get alpha but 0 beta. You temporarily think that the market will increase, so you add systematic exposure via long futures. The key is that you go long in the SAME market (i.e. S&P500) as the alpha position. Alpha and Beta Separation: Same as above, except you pick up your alpha via long/short positions in a DIFFERENT market as your beta since some markets (i.e. the one you get your beta from) are very ineffficent and difficult to get alpha from. Portable Alpha: Same as Alpha and Beta Separation, except that the long/short manager you are achieving alpha with has decided to use a different index of his choosing to get the beta position. To me, this is kind of a misnomer, as it should be called “portable beta” (I made this term up). Portable Alpha where shorting is not possible: Same as Alpha and Beta Separation, except that you cannot go short for whatever restriction. So to replicate the Portable Alpha position, you go long futures in one market to pick up beta, and short futures in the same market as you achieve your long position through a long manager. This information seems consistent with everything on Schweser Book 3 Page 161 and CFAI Volume 4 Page 278 Question 7. Let me know if you have any revisions.
the show NY Wrote: ------------------------------------------------------- > Equitizing Cash: You are long/short two different > stocks in same industry, so you get alpha but 0 > beta. You temporarily think that the market will > increase, so you add systematic exposure via long > futures. The key is that you go long in the SAME > market (i.e. S&P500) as the alpha position. Shall it be "go long in the SAME INDUSTRY rather than SAME MARKET (INDEX) ? > Alpha and Beta Separation: Same as above, except > you pick up your alpha via long/short positions in > a DIFFERENT market as your beta since some markets > (i.e. the one you get your beta from) are very > ineffficent and difficult to get alpha from. > > Portable Alpha: Same as Alpha and Beta Separation, > except that the long/short manager you are > achieving alpha with has decided to use a > different index of his choosing to get the beta > position. To me, this is kind of a misnomer, as > it should be called “portable beta” (I made this > term up). Alpha and Beta Separation = Portable Alpha ?
I am glad we are discussing this as I am terribly confused with Portable Alpha. What is it? Is it about getting Alpha (long/short) from one manager and using another one to get beta? or, it is about using the same manager for both? Why do they call it “portable”?
It’s portable two ways. One I have a manager that is long/short market neutral on the Russell 2000 and consistently earns 4% in every environment because he is a great manager. I use his 0-beta portfolio and buy futures or ETF’s to go long SPX now I have SPX + 400bps of alpha on a yearly basis, much better than a simple alpha strategy on the SPX because I used the best long-short manager. Otherwise I find a manager that is great in say FTSE Indexed stocks and generates 200bps of alpha on a yearly basis. I short FTSE futures and go long SPX futures. Now I have SPX + 200 bps even though the alpha came from the FTSE and not SPX.
Paraguay, correct me if I am wrong: What you described above is two scenarios: first is portable alpha where you can go short and second is portable alpha where going short is not possible
the show NY Wrote: ------------------------------------------------------- > Paraguay, correct me if I am wrong: > > What you described above is two scenarios: first > is portable alpha where you can go short and > second is portable alpha where going short is not > possible Investment policy of the organization will dictate which way to use. Both generate portable alpha. I also never read your post. Just explaining the outcomes.
As far as I know, Alpha and Beta Separation = Portable Alpha. Am I wrong ?
AMA Wrote: ------------------------------------------------------- > As far as I know, Alpha and Beta Separation = > Portable Alpha. Am I wrong ? i honestly cant tell…in both cfai and schweser they bring up alpha and beta separation, loosely explain it, then bring up portable alpha, and give it the same definition as alpha/beta separation…so cant tell if they are synonymous, if one is the subset of the other, or they are they are different
Paraguay Wrote: ------------------------------------------------------- > It’s portable two ways. > > One I have a manager that is long/short market > neutral on the Russell 2000 and consistently earns > 4% in every environment because he is a great > manager. I use his 0-beta portfolio and buy > futures or ETF’s to go long SPX now I have SPX + > 400bps of alpha on a yearly basis, much better > than a simple alpha strategy on the SPX because I > used the best long-short manager. > > Otherwise I find a manager that is great in say > FTSE Indexed stocks and generates 200bps of alpha > on a yearly basis. I short FTSE futures and go > long SPX futures. Now I have SPX + 200 bps even > though the alpha came from the FTSE and not SPX. I completely understand the first scenario as that was the limit of my knowledge regarding Portable Alpha. I knew you can “port” Alpha from one place and then gain exposure to beta somewhere else. Where I get confused about Portable Alpha is the second scenario you gave above. How do you earn Alpha by shorting FTSE futures? You are right in your example as this is exactly how one of the questions in the mock exam outlines earning Portable Alpha but I really don’t understand how. Can you please help me understand how in the above example you earn Alpha by shorting FTSE? Aren’t you actually gaining beta exposure by shorting FTSE (given your Alpha on FTSE has zero beta)?
its the same exact effect as going long/short. the manager is long FTSE, so you create a syntehtic short position buy shorting the futures on ftse to mimic a long/short position.
The manager wants beta exposure to the SPX, not the FTSE. That is why you short the FTSE and long the SPX contract. I think I read somewhere that a market neutral strategy should earn the risk free rate of return. So what if I hired a long short manager and invested in T-bond futures? Did I just port my alpha into a risk free asset?
the show NY Wrote: ------------------------------------------------------- > its the same exact effect as going long/short. > > > the manager is long FTSE, so you create a > syntehtic short position buy shorting the futures > on ftse to mimic a long/short position. oh ok…so is Paraguay saying that the FTSE manager is only Long FTSE? If that is the case than it makes sense to go short on it (to make it market neutral) and then buy SPY to gain beta exposure. I always thought the question is saying, in the above example, that the FTSE manager is both Long and Short the FTSE, not just Long FTSE. I need to learn how to read the question right 
i think the alpha beta separation uses two managers. one for the alpha (long/short market neutral) and one for the beta (market index manager). equitizing long/short would be using the same type of long/short market neutral manager for the portable alpha, but adding an investment in an index for the market (not necessarily another manager).
^^^^^^ Great thread!!!
In Equitizing long-short, you already have an alpha from a long-short strategy and seek beta using an index future. In Alpha Beta separation, you have a beta exposure to a market of your choice and seek alpha elsewhere using a star long-short manager or a less efficient market index.
I think we all understand now. Thanks
Question. How is the return for the equitizing cash stratgey calculated? I understand it as u take the alpha return, beta return and cash invested at the risk free rate from the short sale(in alpha trade) and divide that by equity invested( which is the long from the aplha and the beta). Please help
programmer Wrote: ------------------------------------------------------- > i think the alpha beta separation uses two > managers. one for the alpha (long/short market > neutral) and one for the beta (market index > manager). > > equitizing long/short would be using the same type > of long/short market neutral manager for the > portable alpha, but adding an investment in an > index for the market (not necessarily another > manager). i ddont think you use two mangers…see schweser book 3 page 176 qustion 16. on your own you take a long futures contract for beta and a short futures contract on the manager’s long position. no mention of a second manager–i dont think you need a manager to take futures positions for you.