Asset Allocation Alternatives White Paper

Portable Alpha Revival: A Solution to the Beta/Alpha Mismatch

29 April 2025

3 min read

What You Need to Know

Investors face a new regime, with heightened geopolitical risks and beta sources expected to deliver lower returns than they have in years past. At the same time, market concentration still poses a challenge for active managers seeking to enhance those betas. We don’t think investors should by any means write off active management, but they’ll need to think differently about how to integrate it into their portfolios.

Doing this requires addressing a mismatch between desired portfolio beta exposures and the most fruitful alpha sources. Alpha potential is alive and well in less-efficient and less-exploited market segments, such as small-cap and emerging-market (EM) equities, but few investors are willing to budget substantial beta to those areas. Multi-manager hedge funds also seem like effective alpha generators, but how can investors connect their beta and alpha worlds efficiently?

We think one answer lies in a strategy familiar to many investors yet more refined than the version from decades ago: portable alpha. This solution can efficiently tap into a wide range of attractive alpha streams with capital efficiency while keeping strategic asset allocations on track. If investors implement and govern portable alpha correctly, it may be a powerful tool.

Download PDF

Daniel Loewy, CFA| Chief Investment Officer and Head—Multi-Asset and Hedge Fund Solutions

Alla Harmsworth| Co-Head—Institutional Solutions; Head—Alphalytics

Additional Contributors: Harjaspreet Mand

A Tougher Road Ahead for Most Beta Sources

Investors face a unique mix of structural challenges today: deglobalization, demographics, climate change, record government debt and geopolitical uncertainty. One of the results could be higher inflation and interest rates, which might challenge the role of bonds as “safe” assets and diversifiers to equity exposure. Economic growth will likely be lower, too, implying reduced return potential for many equity markets and growth-sensitive assets. And with valuations high for most key asset types, multiples face mean reversion risk over a strategic horizon.

In our view, all this translates into a worse real-return outlook for many traditional asset-class beta sources (Display 1) and fewer diversification opportunities. This landscape is a far cry from 1980–2020, when rates were falling, disinflation was the norm and diversification was plentiful. The bottom line: traditional asset classes are more likely to underdeliver for investors, and the potential return boost from pivoting into riskier betas seems much more muted. This creates a tough spot for investors focused on total return or real return.

A More-Challenging Landscape Ahead for Traditional Assets Realized Risk and Return vs. Forecasts (Percent)

Current analysis and forecasts do not guarantee future results.
Filled dots represent actual real returns and volatility for January 2010 through December 2024. Dashed dots represent the AB Institutional Solutions team's forecasts for the next five to 10 years. Private equity return data is the US Private Equity Index from Cambridge Associates, compiled from 1,562 funds, including fully liquidated partnerships, formed between 1986 and 2019. All returns are net of fees, expenses and carried interest. Data are provided at no cost to managers. Private equity volatility is estimated from the MSCI US Small Cap Value Index with 15% leverage. Private debt historical volatility is the volatility of the Preqin Private Debt return index.
As of March 26, 2025
Source: Cambridge Associates, FactSet, Federal Reserve Bank of St. Louis, Ken French Data Library, LSEG Data & Analytics, Preqin and AllianceBernstein (AB)

A difficult beta outlook intensifies the need for alpha (the return from active management above the market), but alpha seems harder to find. The median manager in US large-cap equities—the biggest beta pool and largest allocation in many portfolios—has generated zero alpha before fees and negative alpha after fees for at least a decade. Even top-quartile managers have beaten their benchmarks by only 0.6 % annualized over the past decade, on average. Managers using other large-cap developed equity benchmarks—growth, value and core—have also struggled to add value in recent years, a challenge exacerbated by the market’s high concentration in mega-cap tech—the Magnificent Seven problem.

Investors have responded by joining two of the biggest asset-allocation trends of the last two decades: exiting active equity strategies in favor of passive and moving from liquid public markets into private markets, especially private equity. Hedge funds, once a big beneficiary of the move into alternatives, have failed to keep pace, with investors’ allocations to these alpha-centric, low-beta portfolios largely stalling.

Download PDF

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams, and are subject to change over time.

About the Authors

Daniel Loewy, CFA

Daniel Loewy is Chief Investment Officer and Head of Multi-Asset and Hedge Fund Solutions. He oversees the research and product design of the firm’s multi-asset strategies, as well as their implementation. In addition, Loewy is Chief Investment Officer for Dynamic Asset Allocation, and is responsible for the development and investment decision-making for that service. He is also a member of the Real Asset Investment Policy Group and the Target Date Investment Oversight team. Loewy previously led the Wealth Management Group’s research on the major investment issues faced by our highest-net-worth clients, including asset allocation, alternative investments and tax management. Prior to that, he was a research analyst in the equity research department, where he followed the aerospace and defense and capital goods sectors. Additionally, Loewy has served as an associate portfolio manager for our value equity services. He holds a BS in industrial and labor relations from Cornell University and an MBA from Columbia University, and is a CFA charterholder. Location: New York

Alla Harmsworth

Alla Harmsworth is Co-Head of Institutional Solutions and Head of Alphalytics at AB. She was previously head of European Quantitative Strategy at Bernstein Research. Prior to joining Bernstein in 2015, Harmsworth worked for two years on Nomura's Institutional Investor-ranked European Equity Strategy and Quantitative Strategy team. Her previous experience includes seven years at Fidelity as a quantitative analyst and portfolio manager, along with stints at Nikko Asset Management and ABN AMRO. Harmsworth holds a BA (Hons) and an MA in philosophy, politics and economics from University College Oxford and an MSc in economics from the London School of Economics and Political Science. Location: London

This information is for exclusive use of the wholesale person to whom it is provided and is not to be relied upon by any other person. It is not intended for retail or public use and may not be further distributed without prior written consent of ABAL.
This webpage has been prepared by AllianceBernstein Australia Limited (“ABAL”)—ABN 53 095 022 718, AFSL 230 698. Information in this webpage is only intended for persons that qualify as “wholesale clients,” as defined by the Corporations Act 2001, and is not to be construed as advice. This webpage is provided solely for informational purposes and is not an offer to buy or sell securities. The information, forecasts and opinions set forth in this webpage have not been prepared for any recipient’s specific investment objectives, financial situation or particular needs. Neither this webpage nor the information contained in it are intended to take the place of professional advice.
You should not take action on specific issues based on the information contained in this webpage without first obtaining professional advice. Past performance does not guarantee future results. Projections, although based on current information, may not be realized. Information, forecasts and opinions can change without notice and ABAL does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained in this webpage, ABAL does not warrant that this webpage is free from errors, inaccuracies or omissions. ABAL disclaims any liability for damage or loss arising from reliance upon any matter contained in this webpage except for statutory liability which cannot be excluded.
No reproduction of the materials on this webpage may be made without the express written permission of ABAL. This information is provided for persons in Australia only and is not being provided for the use of any person who is in any other country.

Portable Alpha Revival: A Solution to the Beta/Alpha Mismatch

What You Need to Know

A Tougher Road Ahead for Most Beta Sources

More For You