Grounded in the premise of diversification.
Portable beta strategies seek to enhance returns by overlaying an existing portfolio strategy with complementary exposure to diversifying asset classes.
Overlays are achieved with cost-efficient derivatives (e.g. futures), allowing investors to receive the incremental total return of the underlying exposure less a short-term financing cost (typically very close to historical three-month Libor).
A focus on capital efficiency.
In overlaying exposure on an existing portfolio strategy, portable beta strategies seek to make every invested dollar more. This can free up dollars in an investor’s portfolio to invest in other asset classes or investment opportunities.
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The 90/60 Example
Consider an investor who holds a 100% equity portfolio. To improve the diversification within her portfolio, she might consider selling some equities to buy U.S. Treasuries. Doing so, however, will likely result in a lower-risk portfolio with commensurately reduced return expectations.
An alternative approach is to set aside modest capital outlay to obtain synthetic exposure to U.S. Treasuries (e.g. through derivatives like futures or swaps). For example, she might set aside 10% of the capital as collateral for a 60% position in 10-year U.S. Treasuries futures. This is the portable beta overlay.
Taken together, the investor has created a 90/60 stock/bond mix. This portfolio should achieve a return commensurate with that of a 1.5x levered 60/40 portfolio minus the financing rate embedded in the U.S. Treasuries derivatives contracts.