PT  - JOURNAL ARTICLE
AU  - Samer Takirti
AU  - Ingrid Tierens
TI  - Incorporating Transaction Costs in the Construction of 130/30 Portfolios
DP  - 2008 Jun 20
TA  - Special Issues
PG  - 64--73
VI  - 2008
IP  - 1
4099  - https://pm-research.com/content/2008/1/64.short
4100  - https://pm-research.com/content/2008/1/64.full
AB  - Significant attention has been paid to the importance of incorporating shorting costs and the cost of leverage when constructing 130/30 portfolios, as they contribute negatively to net (after-cost) alpha. However, little has been said about the market impact component of the transaction costs associated with 130/30. This article analyzes how transaction costs, i.e., the sum of the cost of leverage, the cost of shorting, and market impact of a 130/30 portfolio, compares to the transaction costs of a long-only portfolio built using the same investment signals. The authors demonstrate how the characteristics of a 130/30 strategy increase the importance of incorporating market impact vs. a comparable long-only portfolio. They then use a small-cap portfolio example to illustrate how market impact can easily dwarf the cost of shorting and cost of leverage in the context of 130/30.