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Portable Alpha Primer_ASAP

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					PORTABLE ALPHA PRIMER

     2006 ASAP Fall
  Investment Conference


      October 27, 2006




                          1
         What is Portable Alpha?

Portable alpha is based on the idea of
separating your beta exposure (your
underlying benchmark) from your alpha
opportunity set (the excess return above a
benchmark).

Beta: Obtain it as cheaply as possible
Alpha: Find a positive and consistent source

                                               2
           Mechanics of Portable Alpha:
      Finding Alpha in Long-Only Managers

Situation: UWF has a solid outperforming manager in our large-cap
equity portfolio, but need a bond manager with positive alpha.

                  Long
               Bond Futures
                                         Total Return
   Futures                                 Implies      Equity
                              UWF
   Market                                               Manager
                                          S&P 500 +
                Short S&P                  Alpha
                500 Futures




    Total Manager Return – S&P 500 Futures + Bond Beta =
    Bond Beta + Alpha
                                                                  3
               Mechanics of Portable Alpha:
             Finding Alpha in Other Strategies

Situation: UWF would like to enhance their alpha in the fixed
income portfolio.

                   Long
                Bond Futures
                                           Net Return
   Futures
                               UWF                      Hedge Fund
   Market
                                           Or Alpha
                  LIBOR




        Bond Futures Return + (Alpha - LIBOR cost)
                                                                     4
             Mechanics of Portable Alpha:
           Finding Alpha in Other Strategies

Situation: UWF would like to obtain alpha in an asset class where a
futures contract does not exist.

                Russell 2000
                 Growth
                                           Net Return
 Third Party
   Swap                        UWF                      Hedge Fund
  Provider                                  Or Alpha
               LIBOR + 0.25%




        Russell 2000 Growth + [Alpha – (LIBOR +0.25%)]
                                                                     5
            Risks of Portable Alpha
• Finding an alpha manager than can provide
  outperformance over the transport cost . . . and the
  higher fees.

• The cost of transport increases in a rising short-term
  interest rate environment.

• Certain asset classes may not have liquid futures
  available and swaps may increase the costs to a
  great degree.

• Leveraged beta or is there beta in your alpha?
                                                           6
         Risks of Portable Alpha

• Liquidity and Rebalancing. The alpha and beta
  will need to be rebalanced as market values
  change. Does the alpha allow for quick
  rebalancing?

• Derivatives. Are derivatives allowed under
  policy and is there expertise on staff to oversee
  the program? Who will oversee the margin
  calls?

• Career risk.
                                                      7
                                      Net Alpha Return

2.50%    2.21%     2.15%             2.20%
2.00%
           1.27%
1.50%                1.09% 1.25%       1.12%                        1.15%
                                                          0.88%
1.00%
                             0.45%             0.41%                  0.41%
0.50%                                                       0.25%
                                                  0.02%
0.00%
-0.50%
                                                                                          -0.35%
-1.00%                                                                        -0.79%         -0.67%
-1.50%                                                                           -1.08%
          Jan-06   Feb-06   Mar-06   Apr-06    May-06      Jun-06    Jul-06    Aug-06      Sep-06

                                       Gross Alpha   Our Alpha




                                                                                                      8
                                       Implementation Costs

         Jan-06   Feb-06   M ar-06   Apr-06           M ay-06         Jun-06   Jul-06   Aug-06   Sep-06
0.40%

0.20%                                                                                    0.1%
                                                                                         0.1%    0.0%
0.00%                                                  0.0%                                      0.1%
         -0.2%
-0.20%            -0.4%     -0.4%    -0.4%                             -0.4%   -0.4%             -0.4%
                                                      -0.4%                             -0.5%
-0.40%   -0.4%
                                                      -0.1%            -0.2%
                            -0.2%                                              -0.2%
-0.60%            -0.4%              -0.5%                             -0.1%
                            -0.1%                                              -0.1%
-0.80%   -0.3%

                  -0.3%              -0.3%
-1.00%

-1.20%


                                         LIBOR Cost    M argin Cost   Fee




                                                                                                          9
   Why Bother with Portable Alpha?

• Potential for higher alpha and information ratio.

• Larger opportunity set.

• Uncorrelated alphas.

• Maintain discipline with your policy portfolio

• Transport costs are low in current interest rate
  environment.

                                                      10
                 Inform ation Ratio (m onthly returns though '98 w hen available)




10.00%                                                                                 Alpha
                                                 Alpha
                                                                                                   L/O Int'l
                                                                   L/O Int'l
8.00%
                                      Alpha
                                                  SC Port     Alpha                        L/O Small
              Alpha
6.00%
                                Alpha                              L/O Small
                        Alpha                 MC Port
                                                         L/O Mid
                                                                               L/O Large
                             Alpha
4.00%
             LC PA Port                           L/O Mid


         Alpha
2.00%
                              LC Port
                     Alpha

             Alpha
0.00%
                                                                                                 Alpha



-2.00%
                                                    R1000G
                                     Alpha


-4.00%
     0.00%     2.00%         4.00%    6.00%      8.00%      10.00%     12.00%     14.00%      16.00%     18.00%


                                                                                                                  11

				
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