Portable Alpha Theory and Practice
What Investors Really Need to Know
Published on 2. April 2008
352 pages
978-0-470-28022-5 (ISBN)
Description
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.
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04/2008
Wiley
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Persons
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.
Content
- Intro
- Portable Alpha Theory and Practice
- Contents
- Foreword
- Preface
- WHAT'S IN THE BOOK
- Acknowledgments
- Chapter 1: Overview of Book and Key Concepts
- 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 PORTABLE ALPHA
- ALPHA, BETA, AND ALPHA-BETA SEPARATION
- GLOBAL SOURCES OF PORTABLE ALPHA, ASSOCIATED RISKS, AND ACTIVE MANAGEMENT
- DERIVATIVES-BASED BETA MANAGEMENT
- PORTABLE ALPHA IMPLEMENTATION
- THE REAL HOLY GRAIL: RISK MEASUREMENT AND MANAGEMENT
- LIABILITY-DRIVEN INVESTING
- PORTABLE ALPHA THEORY AND PRACTICE: WRAPPING IT UP
- Chapter 2: Portable Alpha Definitions and Trends
- THE VALUE OF AND COMPONENTS TO PORTING ALPHA
- THE DERIVATIVES-BASED MARKET EXPOSURE (BETA)
- THE ALPHA STRATEGY
- COMMON MISPERCEPTIONS
- THE EVOLUTION OF PORTABLE ALPHA
- A NEW PARADIGM?
- THE IMPORTANCE OF RETURN- AND RISK
- CONCLUSION
- Chapter 3: Back to the Basics: Investments 101
- 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
- CONCLUSION
- APPENDIX 3.1 OPTION PRICING
- APPENDIX 3.2 MERGER ARBITRAGE EXAMPLE
- Chapter 4: Asset Allocation and Portable Alpha*
- 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 BUDGETING: 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?
- CONCLUSION
- Chapter 5: Alpha, Beta, and Alpha-Beta Separation
- BETA AND ALPHA DEFINED
- CAPM, ALPHA, AND BETA
- ALPHA AND BETA IN A PORTFOLIO EVALUATION CONTEXT
- THE RELEVANCE OF ALPHA VERSUS 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 BY JAMIL BAZ
- Chapter 6: Global Sources of Portable Alpha, Associated Risks, and Active Management
- OVERVIEW BY SABRINA CALLIN AND ALFRED MURATA
- THE EQUITY MARKETS BY DON SUSKIND
- THE FIXED-INCOME MARKETS BY STEVE JONES
- GLOBAL DIVERSIFICATION AND CURRENCY BY RICHARD CLARIDA
- HEDGE FUNDS STRATEGIES BY LISA KIM
- CONCLUSION
- Chapter 7: Derivatives-Based Beta Management
- 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
- CONCLUSION
- Chapter 8: Portable Alpha Implementation
- THE ALPHA STRATEGY
- THE DERIVATIVES-BASED MARKET EXPOSURE (BETA)
- LIQUIDITY FOR MARGIN OR COLLATERAL CALLS
- CONSOLIDATED RISK MANAGEMENT, MONITORING, AND REPORTING
- INTEGRATED APPROACHES
- SEGREGATED APPROACHES
- SEMIBUNDLED APPROACHES
- COMPARING AND CONTRASTING DIFFERENT APPROACHES
- IMPLEMENTATION COSTS
- EVALUATING PORTABLE ALPHA IMPLEMENTATION APPROACHES
- CONCLUSION
- APPENDIX 8.1 SEGREGATED PORTABLE ALPHA CASE STUDY BY BRUCE BRITTAIN
- Chapter 9: The Real Holy Grail: Risk Measurement and Management
- IDENTIFYING RISKS: ALPHA, BETA, AND LEVERAGE
- LIQUIDITY AND CORRELATION
- THE CONSEQUENCES OF LEVERAGE
- STRESS TESTING: MEASURING RISK IN PORTABLE ALPHA
- HISTORY AND TIME HORIZONS
- CONCLUSION
- Chapter 10: Liability-Driven Investing
- 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
- CONCLUSION
- APPENDIX 10.1 BUILDING BETTER BETAS THROUGH FINANCIAL ENGINEERING
- Chapter 11: Portable Alpha Theory and Practice: Wrapping It Up
- ABILITY TO BORROW THROUGH THE DERIVATIVES MARKET SETS THE STAGE FOR PORTABLE ALPHA
- CENTRAL UNDERPINNINGS TO MODERN PORTFOLIO THEORY ARE HIGHLY RELEVANT
- ALPHA AND BETA-IT'S THE COMBINATION THAT MATTERS
- A WIDE VARIETY OF ALPHA SOURCES ARE AVAILABLE
- THE KEY IS IDENTIFICATION, MEASUREMENT, AND DIVERSIFICATION OF RISK FACTORS
- IT'S IMPORTANT NOT TO 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 IS ALSO VALUABLE FOR INVESTORS FOCUSED ON LDI
- PORTABLE ALPHA PROVIDES TOOLS FOR BETTER INVESTMENT RESULTS
- Epilogue: Portable Alpha-The Final Chapter: Schemes, Dreams, and Financial Imbalances: "There Must Be More Money
- RISK ASYMMETRIES: VOLATILITY, SPREAD, LEVERAGE
- ABSOLUTE RETURN DYNAMICS
- THE U.S. CURRENT ACCOUNT DEFICIT, WAR, AND HEDGE FUNDS: BRIEFLY
- PUBLIC POLICY IMPLICATIONS
- CONCLUSION
- Notes
- Bibliography
- About the Authors
- CONTRIBUTORS FROM PIMCO
- CONTRIBUTORS FROM RESEARCH AFFILIATES
- Index
