1. 130/30: The New Long-Only by Lo, Andrew W. and Patel, Pankaj N., (December 11, 2007)
Long-only portfolio managers and investors have acknowledged that the long-only constraint is a potentially costly drag on performance, and loosening this constraint can add value. However, the magnitude of the performance drag is difficult to measure without a proper benchmark for a 130/30 portfolio. In this paper, we provide a passive but dynamic benchmark consisting of a "plain-vanilla" 130/30 strategy using simple factors to rank stocks and standard methods for constructing portfolios based on these rankings. Based on this strategy, we produce two types of indexes: investable and "look-ahead" indexes, in which the former uses only prior information and the latter uses realized returns to produce an upper bound on performance. We provide historical simulations of our 130/30 benchmarks that illustrate their advantages and disadvantages under various market conditions.
2. 130/30 Funds: What is Behind the Commercial Offensive ? by Géhin, Walter, (October 2007)
High-conviction funds, beta-one funds, short extension funds, limited-shorting funds, long-enhanced funds, active extension funds, hedge-fund lite: there is a wide range of terms for what is most frequently called 130/30. Broadly, this strategy initially invests 100% in an index, sells short 30%, and uses the proceeds from the shorts to buy an additional 30% likely to beat the benchmark.
In this paper, we examine some crucial points related to these funds: their theoretical foundation, the optimal level of shorting, the distinction between the quantitative and fundamental approaches, whether these funds are natural extensions of long-only funds, and finally the risk of neglecting their risk.
3. Removing the Long-Only Constraint:The Appeal and Challenges of Implementing 130/30 and Other Long-Short Strategies by Christopher B. Philips, CFA and Francis M. Kinniry Jr., CFA, Vanguard Investment Counseling & Research (2007)
Executive summary. Since the 1990s, the investment management industry has witnessed unprecedented change in the portfolio management process. Technological and computing advancements, increases in the number and quality of competitors, lower leverage costs, innovations in financial engineering, and changes in regulatory structures have led portfolio managers to implement new processes for trading, security and strategy analysis, and implementation. As a result, quantitative investment strategies have taken off, fueled by the ability to screen, manage, sort, and evaluate thousands of securities at previously unavailable frequencies. The combination of widely available technology and seemingly limitless investment strategies has not only given rise to quantitative investing, but has also naturally led to an expansion of the traditional long-only portfolio to include shorting, leverage, derivatives, and alpha porting. For many investors, these new strategies are most often recognized as one of a range of new products including, but not limited to, market-neutral, 130/30 (or 120/20, 150/50, etc.), and long-short funds. In this paper, we explore the rationale behind moving from a traditional long-only active quantitative portfolio to a similar strategy that permits short selling and leverage. We also explore the challenges associated with such a strategy, including the risks, costs, and implementation hurdles. We conclude that:
• Removing the long-only constraint theoretically permits managers to apply information more symmetrically and efficiently.
• The decision to remove the long-only constraint is grounded in the expectation that a given manager will consistently produce excess returns, net of cost.
• Because of the higher costs and implementation risks associated with short selling and leverage, diligent risk control is necessary, and even then long-only managers may still outperform unconstrained managers.
4. S&P has recently devised a Strategy Index for the 130/30 investment strategy. Source materials ensue:
Whitepaper:Introducing a Framework for 130/30 Indexation
Factsheet:The S&P 500 130/30 Strategy Index
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