Equity Strategies: Long/Short Equity
Long/Short Equity Long/short (L/S) equity managers engage in the purchase of equities they anticipate will appreciate (long positions in undervalued companies) and the short selling of equities they believe will decline in value (short positions in overvalued companies). The primary…
An Overview and Categorization of Hedge Fund Strategies
Hedge funds are a complex aspect of alternative investments, with advantages and disadvantages. The fundamental dilemma is whether the additional fees associated with hedge fund investments are justified by the potential for increased returns (alpha) and portfolio diversification. This debate…
Long/Short, Long Extension, and Market-Neutral Portfolio Construction
Portfolio managers who have flexibility in their IPS can choose between exclusively buying equities (long-only) or a combination of buying equities and short-selling other equities simultaneously. The Merits of Long-only Investing Long-term risk premium: Achieved solely through net long investments….
The Well-Constructed Portfolio
A well-constructed portfolio aims to provide investors with promised characteristics efficiently, without guaranteeing benchmark-like results. Key elements include: Clearly defined investment process and philosophy. Alignment with investor risk and structural expectations. Implementation of a risk-efficient methodology. Maintenance of low operating…
Implications Involving Cost
Implicit Vs. Explicit Costs Implicit trading costs are also known as opportunity costs and include market impact costs. When a manager sells a significant amount of stock, the increased selling pressure can push down the security's price, resulting in a…
Assessing the Suitable Risk Level
Heuristic Risk Measures Heuristics are practical rules or general practices that come from experience rather than formal scientific analysis. They're not necessarily wrong, but they tend to be simple, one-size-fits-all solutions and may not align perfectly with modern portfolio theory….
Risk Budgeting Concepts in Portfolio Construction
Risk budgeting involves distributing the total portfolio risk efficiently among its components. It's a crucial element of a robust risk management process, which consists of these four steps: Define the relevant risk metrics based on the fund's mandate: Should you…
Active Share Versus Active Risk
Active Share Active Share represents the degree to which the underlying portfolio mimics a benchmark. $$ \frac{1}{2} \sum_n \mid W_{p,i} – W_{b,i} \mid $$ Where: \(\sum_n\) = Total number of securities in the portfolio or in the benchmark. \(W_{p,i}\) =…
Active Share Versus Active Risk
Active Share Active Share represents the degree to which the underlying portfolio mimics a benchmark. $$ \frac{1}{2} \sum_n \mid W_{p,i} – W_{b,i} \mid $$ Where: \(\sum_n\) = Total number of securities in the portfolio or in the benchmark. \(W_{p,i}\) =…
Portfolio Construction Approaches
Investment approaches can be categorized as: Systematic or discretionary. Bottom-up or top-down. $$ \textbf{Systematic vs. Discretionary} \\ \small{\begin{array}{l|l} \textbf{Systematic} & \textbf{Discretionary} \\ \hline {\text{The objective of systematic strategies is} \\ \text{to construct portfolios whose returns are} \\ \text{derived from a…
