Hi All, I am working on implementing a new investment portfolio at our small investment company. We have identified an investment strategy that produces strong returns when applied on a long only basis to stocks within the FTSE 250 index. However, when we reverse our trading criteria this doesn't produce profitable shorting opportunities. We are at the stage of trying to decide how most efficiently to implement these signals within an investment portfolio that broadly follows either the FTSE 100 or the FTSE 250 but obviously has a degree of out-performance. We dont want to pursue an indexation strategy (buying all the stocks in the index and then employing overweight positions in selected stocks) or anything similar ie. a partial indexation strategy. As there are 250 stocks in the FTSE 250 and our porfolio mandate is for appx 40 stocks at a time, we think it will be nearly impossible to gain Beta exposure through any combination of long equity positions. And in our backtesting this has often turned out to be the case. Hence I am thinking that a logical solution to this problem would be to incorporate FTSE 250 futures into our fund but I am not exactly sure how. If our physical equity portfolio had a beta to the FTSE 250 of less than 1, we could short a smaller dollar value of FTSE 250 futures. This would leave us with an amount of alpha. We could then combine this with a long position in FTSE 250 futures and the alpha would thus be ported onto the FTSE 250 return. However, our equity portfolio currently has a Beta exposure of about 1. So this would entail us shorting out an equal and offsetting value of FTSE 250 index futures to create alpha. Then we would port this alpha onto the FTSE 250 by buying FTSE small cap futures. But in essence all we would have done would be to take away the Beta exposure, and then add it back in. For some reason this doesnt make sense to me. All I want to do it use FTSE futures to aviod having to purchase tons of physical stock. It is also quite possible that my understanding of portable alpha is completely wrong. Can someone give me some advice please?ThanksNik.

QuoteOriginally posted by: nikkIf our physical equity portfolio had a beta to the FTSE 250 of less than 1, we could short a smaller dollar value of FTSE 250 futures. This would leave us with an amount of alpha. We could then combine this with a long position in FTSE 250 futures and the alpha would thus be ported onto the FTSE 250 return. .I'm not sure I follow.You seem to be both long and short in the FTSE 250 futures.Wouldn't that cancel out ?

Hi Ppauper, Thanks for your reply. Yes you are correct. In reality we would just net out our long and short positions before trading. The overall returns profile would look like an alpha generating portfolio combined with a futures (beta) portfolio in the FTSE 250. However, as our beta exposure is approximately 1 the overall result of this strategy is the same as just holding the original equity portfolio (as our long and short index positions would be equal and completely cancel each other out). If I was to try and port this alpha onto another index altogather (the FTSE 100 for instance) it might make a bit more sense. But as explained my real objective is just to create a portfolio that broadly follows the FTSE 250 index with some out-performance (coming from my equity portfolio) without having to buy stock in companies just to gain beta exposure (lots of hassle and transactions costs.) Any clearer?

QuoteOriginally posted by: nikkmy real objective is just to create a portfolio that broadly follows the FTSE 250 index with some out-performance (coming from my equity portfolio) without having to buy stock in companies just to gain beta exposure (lots of hassle and transactions costs.) Any clearer?so you're essentially looking for a portfolio that is something like{long FTSE 250+ long T-bills} but costs the same as {long FTSE 250}so that the long T-bills are essentially free ?This portfolio has the same risk as the FTSE but a higher return (so same beta higher alpha) which is what you want.If that is the case, why can't you just hold the portable alpha by itself,which would be a money-tree:a zero-cost beta-neutral portfolio with positive alpha ?

Hi PPuaper, I am not sure I follow. Could you please try and explain in a bit more detail? If possible I would still like some beta exposure in order to be able to benchmark this against the FTSE index. I might be getting this with the strategy you stated but I am not sure.Sorry if I am missing the obvious. Nik.

If your beta is already 1 then you are by definition tracking the FTSE index and there is no need to go long or short to correct for that.

I hate to say it Nik, but you should just stick to stock-picking otherwise your small investment company may get even smaller.Take the time to learn about portable alpha properly (not from some chat room), then decide whether to implement it. Think of your investors.

Hi Gmike, Sometimes the simplest answers make the most sense. Dont know why I didn't see that before. Our problem however lies in my estimation of Beta, as we dont really track the market as well as we should. Hence my wanting to gain synthetic exposure through futures. Anyway, thanks again. Nik.