Portable alpha and hedge funds: Legal issues

Abstract

Hedge funds are a principal source of excess returns, or ‘alpha’, in the portable alpha strategies that are now gaining in popularity among pension fund trustees and other fiduciary investors. This paper examines two matters of importance to trustees and other fiduciary investors intending to adopt portable alpha strategies. The first is the legal structure of a portable alpha strategy under which the alpha generated by a hedge fund is combined with an index-tracking strategy, with the objective of delivering returns in excess of the relevant index. The second is the interaction of the fiduciary investor's legal duty of prudence with the implementation of a portable alpha strategy.