RT Journal Article
SR Electronic
T1 Incorporating Transaction Costs in the Construction of 130/30 Portfolios
JF Special Issues
FD Institutional Investor Journals
SP 64
OP 73
VO 2008
IS 1
A1 Samer Takirti
A1 Ingrid Tierens
YR 2008
UL https://pm-research.com/content/2008/1/64.abstract
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.