Portable alpha strategies

^{For illustrative purposes only. There is no guarantee expected returns will be realized. “Expected return” in the chart above assumes a 20% cash reserve and 20% cash margin that can be reinvested at the same rate as the cash financing cost to fund the market-linked instruments. Thus, the expected return is equal to the return of 100% market index plus 60% alpha source minus 60% cash financing rate.}

^{The hypothetical performance returns are provided for illustrative purposes only and demonstrated index performance and are not meant to be representative of actual performance or to project returns, does not reflect the deduction of any fees or expenses that might normally apply. The allocation decisions in the hypothetical were not made under actual market conditions and cannot account for the financial risk. One cannot invest directly in an index. Hypothetical performance results are not indicative of future returns.}

^{Potential risks like all investments, there are potential risks involved in a portable alpha framework. Primarily, it is possible for the alpha seeking manager to underperform the cash rate or generate negative absolute returns. Market linked instruments may not perfectly track a market index over time, creating tracking error that may differ from initial return expectations. Secondarily, market linked instruments have the potential for margin calls after large market moves that may require adjustments in the whole portfolio.}

^{Let’s assume we want to get more return from a U.S. Large Cap allocation. If we use a portable alpha approach to replicate S&P 500 beta exposure and make a 60% investment into an alternative strategy such as a global long/short market neutral strategy, the portfolio outcomes can be much more impactful than strong manager selection alone.}

^{Global long/short market neutral strategies are typically high-breadth portfolios that are able to look across global equity markets for opportunities, not just a particular market segment like U.S. large-cap securities. Importantly, because they take both long and short positions they often seek to take advantage of security dispersion in markets, and do not add significantly more beta exposure. As a result, the returns from these types of strategies can be less dependent of market direction, potentially acting as a compliment to the index exposure in up markets and a buffer against volatility in down markets.}

^{The figure below compares the alpha generated by the top quartile of U.S. Large Cap Core equity managers to a portable alpha framework that replicates the S&P 500 Index through market-linked instruments while holding a 60% allocation to an alternative strategy, represented by the HFRI Equity Market Neutral Index.}

^{As you can see, the realized 10-year annualized alpha of a top quartile manager is 0.26%. In comparison, 60% of the HFRX Equity Market Neutral Index return of 4.80%, which represents just the average return of the managers in the category, results in an annual return of 2.88%. After adjusting for 60% of the 2.18% average annual financing costs of the beta exposure over the time period, as measured by the ICE BofA 3-Month Treasury Bill Index, the total alpha of the approach is 1.31% annually.}

^{In a portable alpha framework, untethering alpha generation from the confines of market-cap weighted asset allocations allows investors to optimize return potential away from segments of the markets that are typically more difficult to generate meaningful excess returns.}

^{This example represents model driven allocations, to the underlying top-quartile (25th percentile rank) managers in the eVestment Large Cap Core category as of December 31, 2025. The underlying performance is based on actual historical performance. “Traditional Long-Only Approach” alpha data based on the 10-year average annual alpha generated over the S&P 500 Index for the top-quartile (25th percentile rank) manager in the eVestment U.S. Large Cap Core category. The index return was 13.07% and the manager return was 0.38%. “Portable Alpha Approach” alpha calculated as 60% of the average annual return of the HFRX Equity Market Neutral Index Flagship Funds minus 60% of the ICE BofA 3-Month Treasury Bill Index. The HFRX index return was 4.80% and the T-Bill return was 2.18%. HFRX Index constituents are comprised of private hedge funds published by Hedge Fund Research, Inc. Managers. The average top quartile manager delivered 0.26% alpha after all fees and expenses have been deducted. In a portable alpha approach, a manager delivered 1.57% alpha after all fees and expenses have been deducted. The aggregate performance of the model is hypothetical, and the model is formulated with benefit of hindsight, subject to limitations, and the hypothetical performance returns are not meant to represent actual performance or project returns, does not exist and therefore, invariably show positive rates of return, do not reflect the deduction of any fees or expenses that might normally apply. The allocation decisions in the hypothetical were not made under actual market conditions and cannot account for the financial risk. One cannot invest directly in an index. Hypothetical performance results are not indicative of future returns.}

^{A typical fixed income portable alpha allocation can result in 60% allocation to the alpha-seeking source with the remaining capital allocated to efficiently replicate 100% of the fixed income beta.}

^{Instead of chasing yields in fixed income markets, using alternative strategies as an alpha-seeking source in a portable alpha framework can help maintain the equity diversifying returns investors come to expect from bond allocations.}

^{Alternatives, like multi-strategy funds, are more focused on idiosyncratic return streams that are the result of relative value or long/short security selection opportunities. These can also provide sources of uncorrelated active return that are complementary to other active fixed income managers. Figure 6 compares the alpha generated by the top quartile Core and CorePlus bond managers5 to a portable alpha framework that replicates the given benchmark while holding a 60% allocation to an alternative strategy, represented by the HFRI 500 Relative Value Multi-Strategy Index.}

^{As you can see, the realized 10-year annualized alpha of a top quartile Core and CorePlus manager is 0.77% and 1.34%, respectively. In comparison, 60% of the HFRI Relative Value Multi-Strategy Index return of 4.88%, which represents just the average return of the managers in the category, results in an annual return of 2.93%.}

^{After adjusting for 60% of the 2.18% average annual financing costs of the beta exposure over the time period, as measured by the ICE BofA 3-Month Treasury Bill Index, the total alpha of the approach is 1.62% annually.}

^{Once again, the structural advantage of the portable alpha strategy can unlock the potential for better returns in the category.}

This example represents model driven allocations, depicted above, to the underlying top-quartile (25th percentile rank) managers in the eVestment Large Cap Core category as of December 31, 2025. The underlying performance is based on actual historical performance. “Traditional Long-Only  Approach” alpha data based on the 10-year average annual alpha generated over the S&P 500 Index for the top-quartile (25th percentile rank) manager in the eVestment U.S. Large Cap Core category. The index return was 13.07% and the manager return was 0.38%. “Portable Alpha Approach” alpha calculated as 60% of the average annual return of the HFRX Equity Market Neutral Index Flagship Funds minus 60% of the ICE BofA 3-Month Treasury Bill Index. The HFRX index return was 4.80% and the T-Bill return was 2.18%. HFRX Index constituents are comprised of private hedge funds published by Hedge Fund Research, Inc. Managers. The average top quartile manager delivered 0.26% alpha after all fees and expenses have been deducted. In a portable alpha approach, a manager delivered 1.57% alpha after all fees and expenses have been deducted. The aggregate performance of the model is hypothetical, and the model is formulated with benefit of hindsight, subject to limitations, and the hypothetical performance returns are not meant to represent actual performance or project returns, does not exist and therefore, invariably show positive rates of return, do not reflect the deduction of any fees or expenses that might normally apply. The allocation decisions in the hypothetical were not made under actual market conditions and cannot account for the financial risk. One cannot invest directly in an index. Hypothetical performance results are not indicative of future returns.

^{(1) How should investors think about portable alpha alongside other higher return seeking alternatives like private assets?}

^{We have found that many institutional investors are seeking higher returns by increasingly looking to private markets. In fact, BlackRock estimates that private market opportunities may grow by more than two-thirds by 2029.6 These investors are looking at areas such as infrastructure and real estate debt, distressed debt and direct lending for enhanced returns.}

^{However, as investors increase their allocations to these non-traditional asset classes, it comes with some challenges in the form of maintaining adequate liquidity. These non-traditional asset classes are typically far less fungible than most liquid alternative strategies.}

^{We believe that portable alpha provides an avenue for institutional investors seeking higher returns within core allocation buckets while maintaining the ability to manage and monitor their liquidity profile. Portable alpha strategies can be built with alternative strategies that tend to have better intra-period liquidity and transparency than private assets. The result is investors can seek to increase overall portfolio return while maintaining adequate portfolio liquidity.}

^{(2) How should investors approach managing the “alpha” and “beta” component of a portable alpha framework?}

^{Managing a portable alpha strategy is more complex than a long-only approach because you must monitor both sides of the investment. Although a portable alpha framework splits alpha and beta exposure into two distinct mandates, investors can consider three different implementation options to coordinate and manage those return streams. As outlined in the figure below, implementation options range from in-house solutions and unbundled solutions that can be paired with external alpha sources to fully integrated bundled solutions where a manager oversees the alpha and beta portions.}

^{Although investors can choose to split these roles across two different managers, we believe that a single manager for both components can be beneficial. From the investor's viewpoint, oversight is simplified because there are simply fewer parties involved, which results in fewer moving parts and more consolidated reporting. From the manager’s perspective, they can more effectively manage the mandate because they have a holistic view of the entire strategy. This reduces the need for the investor to coordinate between two managers that are not directly communicating with each other. This is especially important if the strategy requires larger cash reserves, rebalancing, or client funding requests. In this case, a single manager can more easily anticipate these issues and quickly act to adjust both sides of the portfolio accordingly. Finally, by having multiple mandates with the same investment firm, the investor can potentially benefit from fee savings across the two allocations.}

^{(3) How has the use of portable alpha strategies in institutional portfolios evolved over time?}

^{We have seen a growing interest in portable alpha strategies from many global institutions. However, investors may recall that portable alpha strategies had some measure of popularity before the 2008 global financial crisis as well. We believe that there are several missteps the industry took during that time. Namely, many alpha-seeking strategies were just delivering more market beta. And to worsen matters, many beta components of portable alpha strategies did not have adequate cash reserves to handle severe market drawdowns.}

^{As a portable alpha manager for over 30 years, including throughout the entire global financial crisis, we know robust risk management is at the heart of a successful framework. We believe alpha-seeking managers must limit their beta exposure and have a history of delivering uncorrelated alpha. As systematic investors, we are keenly aware of what drives returns in our strategies. Additionally, managers could apply stress tests to determine the size of the cash reserve required to sufficiently cover both mark-to-market moves of the beta index and any potential changes to margin requirements on market-linked instruments. As a provider of both alpha and beta strategies, this consideration is embedded in our investment and risk management processes.}