Catenaa, Thursday, February 27, 2025– Hedge funds are using a diversified investment strategy that seeks to juice returns through leverage more than a decade after it blew up during the 2008 financial crisis, a Bloomberg report said on Thursday.
The report said that the approach, widely known as “portable alpha,” uses derivatives to track returns of long-only indexes and then invests the excess cash in trades beloved by hedge funds, including the likes of trend following or market-neutral equity strategies.
Appetite is perking up for an investing style that failed during the global financial crisis when the diversification value collapsed after assets sold off in tandem and traders weren’t able to exit illiquid positions.
According to Barclays Plc.’s annual survey tracking 325 investors with $ 8.6 trillion in total assets, about 22% of institutional investors, private banks and family offices adopted the investing style as a form of asset allocation last year, which is 10% up from 2023.
The report said the spike in interest comes as active managers struggle to beat a runaway stock bull market, while angst grows about potentially below-average returns ahead given stretched valuations.
Catering to the demand is hedge-fund firms like AQR Capital Management, which have been rolling out more sophisticated versions of portable-alpha offerings.
“Portable alpha is growing in popularity because investors are able to access market returns and combine those with alpha from hedge funds, while primarily only paying fees for the alpha,” US head of Strategic Consulting in Barclays’ capital solution, Roark Stahler told Bloomberg adding that it can be a pretty cost-effective option for investors.
About 75% of the respondents to the Barclays survey said they’re using equity indexes as their beta, or threshold for market returns. For additional gains or alpha, the majority prefers multi-strategy or equity hedge funds.
The survey found the management fee for the alpha side of the program averages 1.4%, with another 17.4% charged on performance.
