This week’s highlights…

• The resurgence of hedge fund performance;
• How major institutions are rethinking their asset allocation models; and
• How innovative “portable alpha” strategies are solving the stock market’s severe concentration problem.

A Banner Year for Alpha

In 2024, hedge funds made a compelling comeback. The average hedge fund returned 10.12%, achieving this growth with five times less volatility than the broader MSCI World Index. Even more notably, the average fund generated 2.62% of alpha, a massive improvement from zero alpha generation in 2023.

For a quick refresher, “alpha” is the excess return driven by an investment manager’s specific skill, while “beta” represents the general, passive return of the broader market. Why the sudden improvement in manager skill? We are transitioning away from a market environment where broad macroeconomic trends dictate everything. Today, individual company fundamentals are increasingly influencing stock prices, creating an ideal, target-rich environment for active managers who rely on deep research to identify mispriced securities.

Tackling the “Magnificent Seven” Problem

If you follow the financial news, you know that a handful of mega-cap tech stocks, often called the Magnificent Seven, have dominated recent market performance. This extreme market concentration creates a massive headache for active stock pickers; if a manager didn’t heavily overweight these specific tech giants, they likely underperformed their benchmark.

To solve this, many institutional investors are turning to “portable alpha”. Portable alpha is a portfolio construction method that separates your market exposure (beta) from the manager’s skill-based return (alpha). By using capital-efficient instruments like futures or swaps to capture the market’s baseline return, investors only need to put up a small amount of cash. The remaining excess cash is then “ported” into uncorrelated alternative strategies, like long/short equity, global macro, or event-driven funds.

Ultimately, this structure allows you to maintain your required stock market exposure while moving the actual hunt for returns away from crowded mega-cap stocks and into diverse areas where managers have a true edge.

Following the Institutional Lead

The largest investors in the world are already shifting gears to take advantage of these concepts. For instance, Delta Air Lines famously managed to turn a severely underfunded pension into a fully funded asset by heavily utilizing portable alpha strategies. By “stacking” uncorrelated active strategies on top of traditional market exposures, Delta engineered a powerful engine for long-term growth and capital efficiency.

Similarly, the California Public Employees’ Retirement System (CalPERS) recently made history by abandoning its rigid, traditional asset allocation buckets in favor of a streamlined “total portfolio approach”. This structural pivot gives their team the flexibility to capitalize on market opportunities wherever they arise, rather than being restricted to specific asset classes.

What You’re Missing

At Halbert Wealth Management, we believe that true diversification requires thinking beyond the traditional 60/40 portfolio constraint, where adding an alternative investment usually means having to sell off a core stock or bond holding.

That is why we want to spotlight an innovative multi-asset “stack” approach, a bespoke portable alpha strategy. Instead of forcing you to choose between essential asset classes, this strategy effectively overlays three distinct, historically uncorrelated return streams: hedged equity, hedged treasury bonds, and hedged gold.

Using capital-efficient instruments, this approach aims to maintain your core market exposure while simultaneously “stacking” the protective and growth-oriented features of treasury bonds and gold. By actively hedging these exposures, the strategy seeks to smooth out portfolio volatility, manage downside risk, and expand your return opportunities regardless of the prevailing economic climate.

It is a powerful way to put your capital to its highest and best use, mirroring the sophisticated frameworks used by top-tier institutional endowments.

Ready to learn more? Be sure to get our fact sheet on “stacked” portable alpha.

Infographic Summary