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Article

130/30: By How Much Will the Information Ratio
Improve?

Ramon Tol and Christiaan Wanningen
The Journal of Portfolio Management Spring 2011, 37 (3) 62-69; DOI: https://doi.org/10.3905/jpm.2011.37.3.062
Ramon Tol
is a fund manager-equities at Blue Sky Group in Amstelveen, The Netherlands.
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  • For correspondence: ramon.tol@blueskygroup.nl
Christiaan Wanningen
is an investment strategist at Blue Sky Group in Amstelveen, The Netherlands.
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  • For correspondence: christiaan.wanningen@blueskygroup.nl
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Abstract

In this article,Tol andWanningen aim to quantify empirically how much the information ratio may improve for a 130/30 extension strategy versus a long-only strategy. The authors collected 42 estimates of transfer coefficients for U.S. large-cap benchmarked 130/30 products and their equivalent long-only products. According to the fundamental law of active management, an improvement in the transfer coefficient directly translates into an improvement in the information ratio, assuming a skillful manager. Their results show an average increase in the transfer coefficient of between 40% and 50%, depending on the long-only tracking error. This finding implies a 40%–50% increase in the information ratio. Furthermore, the authors reason that the increase in the transfer coefficient depends on the tracking error of the long-only strategy. Tol and Wanningen’s empirical results show that to move from a long-only to a 130/30 strategy would result in an average increase in the transfer coefficient of 42% for a strategy with an ex ante tracking error of between 0% and 2%; 48% for a strategy with an ex ante tracking error of between 2% and 3%; and 29% for strategies with a tracking error higher than 3%. This shows that the sweet spot (i.e., the highest increase in transfer coefficient by moving from long-only to 130/30) occurs in the 2%–3% long-only tracking error range. The study reveals theoretically overestimated information ratio improvements for more than 40% of the product pairs.

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The Journal of Portfolio Management: 37 (3)
The Journal of Portfolio Management
Vol. 37, Issue 3
Spring 2011
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130/30: By How Much Will the Information Ratio
Improve?
Ramon Tol, Christiaan Wanningen
The Journal of Portfolio Management Apr 2011, 37 (3) 62-69; DOI: 10.3905/jpm.2011.37.3.062

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130/30: By How Much Will the Information Ratio
Improve?
Ramon Tol, Christiaan Wanningen
The Journal of Portfolio Management Apr 2011, 37 (3) 62-69; DOI: 10.3905/jpm.2011.37.3.062
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  • Article
    • Abstract
    • FACTORS AFFECTING THE TRANSFER COEFFICIENT
    • EMPIRICAL STUDIES ON THE TRANSFER COEFFICIENT
    • DATABASE AND METHODOLOGY
    • EMPIRICAL FINDINGS
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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