Reading 31: Equity Portfolio Management－LOS t

One of the main reasons to undertake an alpha and beta separation approach is to gain an exposure to systematic risk (the beta) through a long position in an equity index. The alpha is picked up using a long-short approach.

A market-neutral hedge fund strategy would be undertaking long-short positions so this would not be available to the investor. An investor restricted from long-short strategies could create a similar exposure as the alpha and beta separation approach by taking a long position in a large-cap index futures contract and invest with a small-cap manager to generate the alpha. To become market neutral in the small-cap market, the investor would then short a futures contract based on small-cap equities.

One of the advantages of an alpha and beta separation approach is that the investor can better understand and manage the risks in an alpha and beta separation approach because they are more clearly defined. The investor also has a better idea of the costs of investing. The passive beta exposure is typically cheaper than the active alpha exposure. The strategy can be implemented in a variety of asset classes. In a portable alpha strategy, the investor can easily pick up systematic risk through a variety of positions using equity index positions while maintaining the long-short alpha.