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130/30

The New Long-Only

Andrew W. Lo and Pankaj N. Patel
The Journal of Portfolio Management Winter 2008, 34 (2) 12-38; DOI: https://doi.org/10.3905/jpm.2008.701615
Andrew W. Lo
Chief Scientific Officer at AlphaSimplex Group, LLC, and Harris & Harris Group Professor at the MIT Sloan School of Management in Cambridge, MA.
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  • For correspondence: alo@mit.edu
Pankaj N. Patel
The managing director of Quantitative Equity Research at Credit Suisse in New York, NY.
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  • For correspondence: pankaj.patel@credit-suisse.com
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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, but the extent of the performance drag is difficult to measure without a proper benchmark for a 130/30 portfolio. A passive but dynamic benchmark can be developed, consisting of a plain-vanilla 130/30 strategy using simple factors to rank stocks and standard methods for construction of portfolios based on these rankings. Two types of indexes are produced—investable and look-ahead indexes; the former uses only prior information, and the latter uses realized returns to set an upper bound on performance. Historical simulations of these 130/30 benchmarks illustrate their advantages and disadvantages under various market conditions.

TOPICS: Equity portfolio management, accounting and ratio analysis, portfolio theory

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The Journal of Portfolio Management
Vol. 34, Issue 2
Winter 2008
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130/30
Andrew W. Lo, Pankaj N. Patel
The Journal of Portfolio Management Jan 2008, 34 (2) 12-38; DOI: 10.3905/jpm.2008.701615

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130/30
Andrew W. Lo, Pankaj N. Patel
The Journal of Portfolio Management Jan 2008, 34 (2) 12-38; DOI: 10.3905/jpm.2008.701615
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