Comments on: New research explores whether 130/30 is actually “optimal” http://allaboutalpha.com/blog/2007/08/01/new-research-explores-whether-13030-is-actually-optimal/ A finance blog about hedge funds, portable alpha and alternative investing. Mon, 13 Feb 2012 11:26:54 +0000 http://wordpress.org/?v=abc hourly 1 By: allaboutalpha.com: AllAboutAlpha.com http://allaboutalpha.com/blog/2007/08/01/new-research-explores-whether-13030-is-actually-optimal/comment-page-1/#comment-96221 allaboutalpha.com: AllAboutAlpha.com Tue, 08 Apr 2008 00:59:08 +0000 http://allaboutalpha.com/blog/2007/08/01/new-research-explores-whether-13030-is-actually-optimal/#comment-96221 [...] While active managers (particularly quant managers) may never actually run out of active short ideas, it is quite possible that at some point their longs may have greater alpha potential than their shorts.  In fact, short extension enthusiasts may recall that this was central to the arguments made by Citibank’s Manolis Liodakis in a posting here last summer. Â Ã‚  [...] [...] While active managers (particularly quant managers) may never actually run out of active short ideas, it is quite possible that at some point their longs may have greater alpha potential than their shorts.  In fact, short extension enthusiasts may recall that this was central to the arguments made by Citibank’s Manolis Liodakis in a posting here last summer. Â Ã‚  [...]

]]> By: wanderer http://allaboutalpha.com/blog/2007/08/01/new-research-explores-whether-13030-is-actually-optimal/comment-page-1/#comment-17270 wanderer Fri, 03 Aug 2007 02:24:09 +0000 http://allaboutalpha.com/blog/2007/08/01/new-research-explores-whether-13030-is-actually-optimal/#comment-17270 A very key issue that has a bearing on level of X in 1X0/X0 is how good or bad is the stock picking model/ability/alpha. Two alternate ways to look at this issue are: (a) The level of optimal X in 1X0/X0 depends highly upon the Information Coefficient (or the Information Ratio) of the active strategy. More specifically, in law man's terms the level of correlation of the active weights with the future returns. If the manager has very good alpha stock picking models, then a higher X is preferred. (b) Another alternate way to look at this is using the beta (which is different from the tracking error point of view). Most serious alpha stock picking models end up having negative beta with the general market. If we imagine the 1X0/X0 as made up of 100 & X0/X0, then the negative correlation can help the 1X0/X0 achieve a higher Sharpe, since negative correlation will reduce the combined volatility. The level of beta of the stock picking alpha process is an alternate way of deciding the X in 1X0/X0. Higher the negative correlation, the higher level of X we can take. A very key issue that has a bearing on level of X in 1X0/X0 is how good or bad is the stock picking model/ability/alpha. Two alternate ways to look at this issue are:

(a) The level of optimal X in 1X0/X0 depends highly upon the Information Coefficient (or the Information Ratio) of the active strategy. More specifically, in law man’s terms the level of correlation of the active weights with the future returns. If the manager has very good alpha stock picking models, then a higher X is preferred.

(b) Another alternate way to look at this is using the beta (which is different from the tracking error point of view). Most serious alpha stock picking models end up having negative beta with the general market. If we imagine the 1X0/X0 as made up of 100 & X0/X0, then the negative correlation can help the 1X0/X0 achieve a higher Sharpe, since negative correlation will reduce the combined volatility. The level of beta of the stock picking alpha process is an alternate way of deciding the X in 1X0/X0. Higher the negative correlation, the higher level of X we can take.

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