130/30: The New Long-Only
Andrew W. Lo
Massachusetts Institute of Technology (MIT) - Sloan School of Management; Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); National Bureau of Economic Research (NBER)
Pankaj N. Patel
Credit Suisse
December 11, 2007
Abstract:
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.
Keywords: Long/Short Equity, Hedge Funds, Active Extension, Indexes
JEL Classification: G12
working papers series
Suggested Citation
Lo, Andrew W. and Patel, Pankaj N., 130/30: The New Long-Only (December 11, 2007). Available at SSRN: http://ssrn.com/abstract=1074622
