Inefficiencies of Portable Alpha Models

Download or read book Inefficiencies of Portable Alpha Models written by Eric A. Murphy and published by . This book was released on 2006 with total page 10 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper dissects the portable alpha strategy, which has recently gained popularity with institutional investors. Using arbitrage-free pricing theory, I show that the use of derivatives to create synthetic exposure in portable alpha models is irrelevant and merely creates unnecessary levels of complexity and inefficiencies. I demonstrate how the portable alpha technique is nothing more than borrowing money and investing in hedge funds or funds of funds. Furthermore, I extend a recent Fama and French model to demonstrate that the practice of separating alpha, and making it portable, creates further inefficiencies when the investor holds a diversified portfolio.