130/30: The New Long-Only

Posted: 17 Dec 2007

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Pankaj N. Patel

Cirrus Research, LLC

Date Written: 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

Suggested Citation

Lo, Andrew W. and Patel, Pankaj N., 130/30: The New Long-Only (December 11, 2007). Available at SSRN: https://ssrn.com/abstract=1074622

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Stata Center
Cambridge, MA 02142
United States

Pankaj N. Patel

Cirrus Research, LLC ( email )

303 S Broadway
Suite 212
Tarrytown, NY 10591
United States
9142891436 (Phone)

HOME PAGE: http://cirrus-res.com

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