We have always been in favor of portable alpha as the best way to gain both beta and alpha exposure. Stop thinking about picking managers and pick the amount of beta and potential alpha. Don't pay a premium for beta. Pay for your alpha only. The following graphs are from Blackrock and Pimco and provide the basic framework.
The idea that you can engineer extra value always has appeal for investors, yet there is a need to look at the risk portion of the equation and the fact that alpha generation must meet a minimum to offset the costs of the engineering.
One, the risk is based on the amount of leverage used. Do you want to have 100% equity exposure plus alpha or do you want to undertake this strategy without a higher notional value? The correlation for the alpha strategy with the market matters. Second, given there are costs with the strategy, there must be an expectation that alpha will be both positive and above the financing costs. There is also a need for the alpha to be uncorrelated with the market return so that any beta shortfall will be offset by alpha and lower risk.
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