What are the best ways to isolate alpha and, having done so, what instruments are available for transporting?
Niki Natarajan, InvestHedge
How is alpha transported and is there just one mechanism?
Mike Thomas, Russell Investment Group
Alpha can be transported in a number of different ways, although before it can be transported it needs to be isolated. The basic idea is to remove market exposure [beta exposure] that you do not want and obtain the beta exposure that you do want. Once the alpha generator has been selected, then you start looking at the instruments that are available to you to do the porting.
This is a bit of an oversimplification, but I think you can break the alternatives into exchange-traded instruments like futures and over-the-counter instruments like swaps and maybe forwards.
The next step is to look at the pros and cons of different instruments. There are a lot...