Alpha Transport With Derivatives

Abstract

Derivatives can be used to transport the alpha from a manager's selection of securities to virtually any desired asset class benchmark. The authors demonstrate that, by liberating the security selection return from the asset class return, alpha transport allows investors to find the best opportunities in both asset allocation and security selection. They also show how long-short portfolio construction can further enhance return by allowing managers to pursue the best investments in both “winning” and “losing” securities.