Portable Alpha

What a great name for a supplement...we can picture the ad copy: "Guaranteed to alleviate any feelings of testosterone deficiency...Portable Alpha! Put an end to your beta life forever..."

First, a little about how alpha and beta work in the financial markets (Here, they don't deal directly with driving the best car or getting to date models, though that form of "alpha" might come later, once the checks are cashed.)
When you make money in the markets, there are two potential things going on. You might just be a lucky doof. You buy into a stock at random. That stock happens to go up, just because the market as a whole is going up. Everyone is making money, so you make money, too. You're part of the pack. A beta.

To be an alpha, you have to get out in front. Something you do has to contribute to the portfolio returns. You have to be smart. You have to be savvy. You can't feel any effects of testosterone deficiency. Alpha.

In general, beta refers the volatility of a particular investment...a specific stock, a sector, an asset class, whatever. It represents the general market return for that investment. Alpha represents the return above and beyond that baseline. It's a relative measure. It asks "How much more did I make than the lucky doofs?" (Or, in bad markets, it asks, "How much less did I lose than unlucky doofs?")

In this conception, alpha and beta are tied together. Portable alpha seeks to separate the two. In a portable alpha strategy, the investor will still get a particular beta for the type of portfolio they desire. But a fund manager will seek to goose the returns by bringing alpha in from some other asset classes.

So...say an investor is getting close to retirement and wants a nice, safe portfolio. They want low volatility...restrained beta. Typically, they would hold things like bonds and dividend-generating equities. Nothing wild. A fund manager using portable alpha would recreate the beta of this portfolio, but include something with more upside potential. It's like having tuna caserole...with sirracha. Investments in Russian technology startups...in early-stage biotech firms...whatever. The fund manager will invest in these higher-risk areas, but then will also hedge these positions with options and futures bets. Thus, the beta for the portfolio remains the same as the safe, boring one the investor wants. But some alpha is ported in from the higher-action investments in tech startups and biotech.