RT Journal Article
SR Electronic
T1 Active 130/30 Extensions and Diversified Asset Allocations
JF Special Issues
FD Institutional Investor Journals
SP 25
OP 47
VO 2008
IS 1
A1 Martin L. Leibowitz
A1 Anthony Bova
YR 2008
UL https://pm-research.com/content/2008/1/25.abstract
AB Virtually all asset allocations have risks that are dominated by a 90% or greater correlation with equities. This high correlation acts as an 800-pound equity gorilla lurking behind the multi-asset façade of even the most diversified allocations. Benchmark-centric equity strategies such as active 130/30 extensions aim to have tracking errors (TE) that are largely uncorrelated with equities. Within equity-dominated allocations, these uncorrelated TEs should have little impact on fund-level volatility risk. Positive alpha opportunities from these 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 forms of “beyond-model” risk. Moreover, because such strategies relate to the basic equity assets, they help minimize any “stress beta” effects from short-term correlation tightening.