TY - JOUR T1 - Achieving Higher Alpha Using 130/30 JF - Special Issues SP - 96 LP - 114 VL - 2008 IS - 1 AU - Pankaj N. Patel Y1 - 2008/06/20 UR - https://pm-research.com/content/2008/1/96.abstract N2 - In last couple of years, in their attempt to extract additional alpha from their portfolios, more and more active managers have been allowed to short a portion of their portfolios. Shorting allows managers to increase their portfolios' efficiency, based on their knowledge of which stocks are likely to underperform. We believe that as more and more managers learn how to short effectively, shorting in long-only portfolios will become an integral part of portfolio management. Decisions as to how much to short will be based on targeted active risk, the number of securities in the portfolio, benchmark concentration, the correlation among stock in the benchmark, and model effectiveness. We expect that in next few years, more and more active mangers will explore and adopt these “short extension” strategies to increase their efficiency and provide higher alphas to their clients. This article provides an overview of different equity strategies and a discussion of the short-extension strategy, or the “130/30” class of strategies, in detail. We explore the long-only constraint, the Fundamental Law of Active Management, and the importance of the transfer coefficient. We focus on practical aspects of 130/30-type investment strategies, including 1) optimal shorting levels, 2) availability of shares for shorting, 3) alpha availability on the short side, 3) portfolio construction, 4) prime broker relationship, and 5) short-sale mechanics. ER -