AQR came out with a new research piece called Portable Alpha: Why Now? The Problems: Elevated Equity Valuations and Macro Volatility. Their argument is that given the high valuations, investors should consider portable alpha to gain the extra exposure of hedge funds. Keep your 60/40 stock bond exposure and add in the hedge fun exposure on top of the core. This is a sound argument, but it begs the question of why hold the classic 60/40 mix.
If you think equities are overvalued, you can change the asset allocation mix and add the hedge fund exposure. For example, you could increase the bond exposure through futures and then add the alternative exposure as a return kicker for added value.
This can be the right time for portable alpha, but it does not have to be based on holding equity exposure constant.
The portable alpha approach can be used numerous ways as a method for both return enhancement and risk reduction. The process of adding alpha to core exposure can come in many forms.
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