A Note on Investor Diversity and Portable Alpha

Abstract

A complication for evaluating the performance of money managers is the possible diversity of their clients. Performance generally is conditional on the client’s risk tolerance, risk exposures, return expectations and investment restrictions, among other things. Without detailed information about these parameters, it generally seems difficult to unambiguously measure and evaluate investment performance. This complicates the discussion about the average level of fund performance, the persistence of performance and the relation between past performance and investments flows. However, the appraisal of a money manager is less ambiguous if the money manager neutralizes her exposure to common risk factors and offers her clients a ‘portable alpha’. Our hypothesis is that ‘portability’ plays an important role for persistence and the flow-performance relation.