Active Equity Strategy Notes
The CFA Institute Conference Proceedings September 2007, includes a presentation by Gordon B Fowler, Jr entitled "Understanding 130/30 Equity Strategies". It is clearly written piece that covers the subject well.
Introduced as a cross between a typical long-only strategy and a hedge fund strategy, 130/30 funds allow managers to take advantage of research indicating stock underperformance while maintaining a market exposure.
There is discussion about the optimal weight for such a strategy which will depend on the impact on the portfolio's information ratio of increased amounts of the long/short strategy eg 100/0, 110/10, 120/20, etc.
Importantly Fowler notes the additional costs (mainly interest rate difference between the rate earned on amounts held as collateral and rate paid on stocks borrowed for short selling) and risks that are peculiar to short selling. The implication is that for managers with an established long only process, the introduction of short selling poses special risks.
As indicated in the ealier post titled "Myths about Enhanced Active Equity Strategies", such funds still carry market risk that needs to be managed (sharemarkets can decline) and any amount of long/short will count for little if the manager is not able to add alpha in a sustainable manner.
By Rick Steele
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