Active 130/30 Extensions: Alpha Hunting at the Fund Level

Journal of Investment Management, Vol. 5, No. 3, Third Quarter 2007

Posted: 22 Oct 2007

See all articles by Anthony Bova

Anthony Bova

Morgan Stanley

Martin L. Leibowitz

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF)

Abstract

Active equity strategies that are highly benchmark-centric will generally have a minimal impact on fund-level volatility. Since most US institutional portfolios are overwhelmingly dominated by their equity exposure, any incremental tracking error will be submerged by the beta effect. Positive alpha opportunities from tightly beta-targeted strategies can therefore be particularly valuable because they can significantly increase the fund's total return with only minor increases in the overall volatility or other "beyond-model" forms of risk. Active extensions strategies such as "130/30" portfolios are intrinsically benchmark-centric and can potentially lead to higher levels of active alpha. The expanded footings open the door to a fresh set of actively chosen underweight positions and provide a wider range of alpha-seeking opportunities for both traditional and quantitative management. Active extension strategies can be designed to fit within a sponsor's existing allocation space for active US equity. With proper risk control, an active extension may entail tracking error that is only moderately greater than that of a comparable long-only fund. A carefully implemented active extension can expand relationships with existing managers. A sponsor may wish to draw upon those active managers that have already been vetted in terms of their alpha-seeking skills, organization infrastructure, and risk-control procedures. The preconditions for realizing any of these benefits are a credible basis for producing positive alphas in both long and short portfolios, a high level of risk discipline, an ability to minimize and/or offset unproductive correlations, and an organizational ability to pursue active extensions in a benchmark-centric, cost-efficient fashion.

Keywords: Active extensions, 120/20 portfolios,130/30 portfolios, long/short portfolios, institutional portfolios, beta, alpha, tracking error

Suggested Citation

Bova, Anthony and Leibowitz, Martin L., Active 130/30 Extensions: Alpha Hunting at the Fund Level. Journal of Investment Management, Vol. 5, No. 3, Third Quarter 2007, Available at SSRN: https://ssrn.com/abstract=1023698

Anthony Bova (Contact Author)

Morgan Stanley

1585 Broadway
New York, NY 10036
United States

Martin L. Leibowitz

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) ( email )

730 Third Avenue
New York, NY 10017-3206
United States

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