Strategy Alternatives

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dude's picture
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Joined: 2005-11-15

I thought it might be interesting to hear about different approaches to running your clients' money.  I'd really enjoy hearing a summary of the "system" you are using (if you're  sensitive about giving away the 'secret sauce' fine, just give an overview then),  what you believe to be the most critical element is in managing the risk of your strategy, what kinds of returns on average (I'm not interested in the one account you have that is up by XX% YTD) and what periodicals, books or services are most influential on your thinking.  It also might be interesting to hear how you implement it across multiple accounts.
As far as the typical Financial Planning, fee based wrap acct, I hire managers approach; I'm not that interested (since it's what I do and hear about all the time) unless you are doing something you percieve to be different (perhaps portable alpha, alternative assets, unique timing etc..).
Anyway, thanks for your comments and insights.

troll's picture
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Joined: 2004-11-29

portable alpha?
wft is that?  sounds like something a plumber might carry in the back of his van.....

skeedaddy's picture
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Joined: 2005-06-16

Joe, you are a trip man. Thanks for keeping it light.

Duke#1's picture
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Joined: 2004-12-06

I've used a portable potty.

skeedaddy's picture
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Joined: 2005-06-16

I need a break from this forum. That Mike Buttler, The Field Marshall guy,
makes me work too hard, and always insists on getting the last word.

Knock yourselves out.

exEJIR's picture
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Joined: 2005-05-12

Are you talking about adding alpha by investing in non-correlated stocks?

dude's picture
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Joined: 2005-11-15

Portable alpha is a strategy that incorporates using a low cost method to gain exposure to a specific index eg: s&p500 usually via swaps or futures generally using 10% of the capital utilizing leverage to create a 100% exposure (10% times 10 leverage ratio) to that index.  With the remaining 90% capital you would then buy a manager (or multiple managers)in an investment style (or styles)with high probability for out performance (alpha) of the relative index (small cap, international or other less efficient markets) then you short the relative index, hedging away market risk, thereby isolating the managers alpha which is what you're paying an active manager for anyway right?.  In essence it is a very sophisticated strategy to isolate a managers excess returns no matter what their market (smCap, midcap, foreign,currencies, you name it) and "port" it onto an asset class exposure such as let's say Large Cap.  Do a google search on portable alpha for technical paper's that do a better job of describing it than I did.

dude's picture
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Joined: 2005-11-15

ExJIR
You do not get Alpha by investing in non coorellated investments.  alpha is a metric which indicates the excess returns a manager has generated relative to his/her benchmark.

dude's picture
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Joined: 2005-11-15

Thanks for keeping it light gentleman.

Let's hear some ideas.

bankrep1's picture
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Joined: 2004-12-02

Portable alpha is a strategy that incorporates using a low cost method to gain exposure to a specific index eg: s&p500 usually via swaps or futures generally using 10% of the capital utilizing leverage to create a 100% exposure (10% times 10 leverage ratio) to that index.  With the remaining 90% capital you would then buy a manager (or multiple managers)in an investment style (or styles)with high probability for out performance (alpha) of the relative index (small cap, international or other less efficient markets) then you short the relative index, hedging away market risk, thereby isolating the managers alpha which is what you're paying an active manager for anyway right?.  In essence it is a very sophisticated strategy to isolate a managers excess returns no matter what their market (smCap, midcap, foreign,currencies, you name it) and "port" it onto an asset class exposure such as let's say Large Cap.  Do a google search
 
And you said explaining an annuity to a client is complicated Ha!

dude's picture
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Joined: 2005-11-15

BankRep:
Problem is, is that I'm expecting that at least you'll understand what I'm talking about.   I'm not talking to clients now am I?
This is a strategy generally reserved for very sophisticated investors, who would get it, but thanks for keeping me on my toes.
 

troll's picture
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Joined: 2004-11-29

bankrep1 wrote:
Portable alpha is a strategy that incorporates using a low cost method to gain exposure to a specific index eg: s&p500 usually via swaps or futures generally using 10% of the capital utilizing leverage to create a 100% exposure (10% times 10 leverage ratio) to that index.  With the remaining 90% capital you would then buy a manager (or multiple managers)in an investment style (or styles)with high probability for out performance (alpha) of the relative index (small cap, international or other less efficient markets) then you short the relative index, hedging away market risk, thereby isolating the managers alpha which is what you're paying an active manager for anyway right?.  In essence it is a very sophisticated strategy to isolate a managers excess returns no matter what their market (smCap, midcap, foreign,currencies, you name it) and "port" it onto an asset class exposure such as let's say Large Cap.  Do a google search
 
And you said explaining an annuity to a client is complicated Ha!

I would submit that explaining it to most clients is IMPOSSIBLE!
Sounds great in theory, but in practice the sort of thing that could completely BLOW UP if certain 'normal' relationships went askew.  Just remember LTCM!

exEJIR's picture
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Joined: 2005-05-12

dude wrote:
ExJIR
You do not get Alpha by investing in non coorellated investments.  alpha is a metric which indicates the excess returns a manager has generated relative to his/her benchmark.

 
Thanks for clearing that up.   

exEJIR's picture
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Joined: 2005-05-12

But.. you CAN improve your alpha using either non- corelated inv, or loading up on inv in your benchmark that you believe in strongly.
Maybe the confusion is coming from our management styles.  I typically use a core-satellite asset allocation using ETFs as the core, and then boost alpha in the satelite portion.

troll's picture
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Joined: 2004-11-29

exEJIR wrote:
But.. you CAN improve your alpha using either non- corelated inv, or loading up on inv in your benchmark that you believe in strongly.
Maybe the confusion is coming from our management styles.  I typically use a core-satellite asset allocation using ETFs as the core, and then boost alpha in the satelite portion.

I have satellite radio in my care.  It's really great.

dude's picture
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Joined: 2005-11-15

ExJIR:
Cool strategy.  Portable alpha lends itself well to core satelite stragtegies, although good luck selling the concept!  
Joe:
On the portable alpha issue, it really isn't all that 'exotic' or likely to blow up like LTCM, as long as you are sticking to exchange traded instruments like index futures; with swaps which are OTC and expose one to counterparty credit risk we might have a different story.  It really is simple in that you are effectively Market neutral on the "alpha ported" capital allocation and any excess returns the alpha manager has relative to his benchmark will be "stripped" since you are short his/her relative index in equal balance.  If the manager is down less than their benchmark by 5% in a down market you get a 'risk free' excess return of 5% (minus the going t-bill rate), if the manager is up by more than 5% in an up market you get a  'risk free' excess return of 5% (minus the going t-bill rate) even if the market is up 20% since your short position is essentially offsetting that portion of the gain.  If a manager is up 5% less than their benchmark you'll have a 5% loss and vice versa. 
The concept is based on the idea that very liquid and popular market segments (like Large Cap) offer less opportunity for managers to provide alpha so why pay a premium for underperformance.  We still need a Large Cap exposure so lets get it as inexpensively as we can and tap into less liquid markets where paying an active manager may provide better possibility for excess return and then hedge away the additional risk of that market so our overall volatility remains the same as if we never bought into Emerging Market equity (or whatever the alpha managers style/exposure is). 
Fundamentally it is no more risky than buying an index, mutual fund or SMA, as long as one is using exchange offered, actively traded, liquid vehicles for the index exposure and the hedging, Or the counterpart in the swap agreement is very highly credit rated and reputable. 
Also Joe, remember that LTCM was trading in very exotic and illiquid derivatives contracts, in markets around the world in contracts exposed to volatile emerging market debt and currencies.  In addition they were leveraged by something like 1000+ times (my recolection on this is a little hazy so allow me some leeway here) in these illiquid contracts.  Portable alpha actually has no leverage after the strategy is fully executed since the alpha position is effectively market neutral.  It would be like putting up 10% margin on a futures contract and keeping the rest in Tbills. 
Finally, I was not promoting this strategy, merely alluding to it as something different that I've heard about and offering it as an example.  I think that in concept it is not harder to understand than a VA; they are both hard to understand.  I think I could just as easily explain this as a VA with all the bells n' whistles.  It would take a lot of pictures and time though, and just like I wouldn't want to be on the receiving end of a pissed VA client when they discover that they can't access their $ when they need it and didn't understand the product when another adivsor explains why they got screwed, I certainly wouldn't want to pitch this to anyone but the most sophisticated investors. 
Anyway let's hear some ideas, I didn't want to get caught up in something I just mentioned as a small example.   I want to hear about what you guys are doing. 

exEJIR's picture
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dude wrote:
ExJIR:
Cool strategy.  Portable alpha lends itself well to core satelite stragtegies, although good luck selling the concept!  
 

 
Have about 40MM under management using the concept! 

dude's picture
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Joined: 2005-11-15

You are kicking my a*s in AUM, so I humbly hang my head.
I meant selling the portable alpha concept.  Core Satelite is much more straight forward.
Is no one interested in sharing their strategies?
 

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