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Al~ha Transwrt with Derivatives 379 with a long-only portfolio. By purchasing futures in an amount ap proximately equal to the investment the long-short strategy, the manager or investor can establish exposure to a desired asset class. (Alternatively, the manager can enter into a swap to obtain a desired asset class exposure.) An equity index futures position will, for example, impart to the overall portfolio the return and risk of the underlying equity benchmark [see Jacobs and Levy (19991. In addition, the portfolio will retain the return and risk of the longshort manager’s active security selection-the long-short spread. This return should benefit from the longshort manager’s added flexibility, attributable to the absence of restrictions on portfolio construction imposed by securities‘ benchmark weights, to pursue return and control risk. Performance may be further enhanced by relaxation of additional constraints. For example, optimal long-short portfolio construction does not necessarily require benchmark neutrality [see Jacobs, Levy, and Starer (1999)l. Rather, the optimal exposure to t benchmark arises naturally from an integrated optimization that takes the characteristics of the benchmark security explicitly into account, along with the risks and returns of the individual securities. TO BOLDLY GO Long-short portfolio construction affords flexibility in pursuit of return and control of risk at the individual portfolio level. Alpha transport affords flexibility in pursuit of return and control of risk at the overall fund level. By improving the manager’s ability to imp ment investment insights, long-short construction can to lead better performance from security selection. Alpha transport can, in turn, enable the investor to capture that enhanced performance while maintaining the performance from the desired asset allocation. Enhanced flexibility in asset allocation and enhanced potential for adding value from security selection should embolden both investors and managers in the pursuit of active returns. As new derivatives instruments are introduced, and existing ones develop liquidity (perhaps as the result of increased use by alpha transporters), opportunities for adding value should increase. Derivatives and portfolio construction techniques, such as long-short, are essentially tools, however. They may be able to en-
hance good performance, but they cannot turn bad performance into good performance; in fact, both derivatives and long-short can magnify an investor’s exposure to poor performance. In the end, the ability of either alpha transport or long-short construction to add value rests on the quality of the insights going into the investment process. Live long and prosper! ENDNOTE The authors thank Judith Kimball for editorial assistance. REFERENCES Brinson, G. P., B. D. Singer, and G. L. Beebower. 1991. “Determinants of portfolio performance E An update.” Financial Analysts Journal47 (3): 40-48. Jacobs, B. I. and K. N. Levy. 1995. “Enpineering portfolios: A unified approach.” Journal of Investing 4 (4): 8-14. -and- .1996.“20 myths about longshort.” Financial Anulysts Journal 52 (5): 81-85. -and- .1997. “The long and short on long-short.” Journal of Inwsting 6 (1):73-86. -and- .1998.“Investment management: An architecture for the equity market.” In Actiw Equity Pottfolio Manugement, F. J. Fabozzi, ed. New Hope, Pennsylvania: Frank J. Fabozzi Associates. Jacobs, B. I., K. N. Levy, and D. Starer. 1999. “Long-short portfolio management: An integrated approach.“ Journal of Portfolio Manugement 26 (2): 23-32. Sharpe, W. F. 1992. “Asset allocation: Management style and performance measurement.” Journal of Portfolio Management 18 (2): 7-19.
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EQUITY MANAGEMENT.
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EQUITY MANAGEMENT Quantitative Anal
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To Ilene, Lauren, Julie, Sam, and E
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CONTENTS Foreword by Harry M. Marko
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Contents ix Chapter 4 Calendar Anom
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Contents xi Implications 272 High-D
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FOREWORD by Harry M. Markowitz, Nob
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Foreword xv In practice, of course,
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Foreword xvii that an RDM would con
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xix
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INTRODUCTION Life on the Leading Ed
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Life on the Leading Edge 3 tion abo
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Life on the Leading Edge 5 clude th
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Life on the Edge Leading 7 stocks t
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Life on the Leading Edge 9 . Quanti
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Life on the Leading Edge 11 By the
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Life on the Leading Edge 13 ple, st
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Life on the Leading Edge 15 find be
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Life on the Leading Edge 17 equal t
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P A R T ONE Selecting Securities A
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Selectine Securities 21 stocks. Suc
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selecting secunties 23 unmoved by s
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CHAPTER 1 The Complexity of the Sto
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The Complexity of the Stock Market
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The Complexity of the St& Market 31
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The Complexity of the St& Market 37
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The of the Complexity Stock Market
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The Comdexitv of the Stock Market 4
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V 7
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Disentangling Equity Return Regular
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Disentangling Equity Rehun Regulari
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Disentangling Equity Rehun Regulari
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64 selecting securities aged 59 bas
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66 selecting Securities FIGURE 2-2
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68 selecting securities FIGURE 2-3
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70 selecting securities tic of 17.8
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72 selecting securities Some Implic
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74 selecting securities Table 2-2 d
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I l
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82 Seleaine Securities these time-s
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84 selecting securities of 9.7. The
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86 selecting securities 2. There ar
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and deferring gains [as per Constan
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90 selecting securities 35. For exa
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92 selecting securities 49. Before
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94 selecting securities Ball, R. 19
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96 selecting securities Iowa, Ames.
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98 Seleaine securities James, W. an
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100 selecting securities Nicholson,
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102 selecting securities Tinic, S.
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104 selecting securities VALUE AND
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106 selecting securities Street Jou
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108 Selectine Securities This is no
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110 selecting securities plaining s
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112
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114 selecting securities transient
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116 selecting securities Na'ive Exp
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118 selecting securities (1988c)l.
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l20 selecting securities average of
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124 selecting securities We have de
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126 selecting securities movements
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l28 selecting securities 34. Pensio
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130 selecting securities Einhom, S.
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132 Selectine securities Poterba, J
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136 selecting securities The availa
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138 selecting securities subsequent
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142 Selectine securities FIGURE 4-2
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144 selecting securities others usi
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146 Selectine Securities FIGURE 4-3
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l48 SelectirlE securities a market
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150 . selecringsecurities There is
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152 selecting securities 1981 and 1
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154 seleding securities Chari,V., R
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156 Selectine securities McNichols,
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160 selecting securities that betwe
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162 selecting securities Handa, Kot
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164 selecting securities risk does
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166 selecting securities returns ac
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168 selecting securities ket return
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~ more 170 Selectine securities tiv
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h h h h W v ) 000000 m N m w r "80q
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~~~ ~ ~~ 174 selecting securities A
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176 selecting securities hibit feed
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178 Seledine securities multivariat
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-2 1982 1983 1984 1985 1986 1987 18
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182 selecting securities rate produ
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184 Seledine Securities 11. Further
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186 Seleaine securities REFERENCES
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188 selecting securities Fama, E. a
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190 selecting securities Miller, E.
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194 Selectine Securities modeling p
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196 selecting securities surement e
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Earnings Estimates, Predictor Speaf
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0 a I "F c2 . 2 0
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216 selecting securities The Return
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U) J U) C Q) U) C S r jo-0 eke I C
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?68% $1-0 I 220
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222 Seleaine Securitiff ings data f
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224 selecting securities 4. The dif
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226 selecting securities 20. Note t
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230 Managing Portfolios have concen
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232 Managing Portfolios portfolios.
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234 Manaeine Portfolios of investme
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236 Managing Portfolios There is, n
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238 Managing Portfolios bound to ig
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240 Managing Portfolios expected to
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242 Managing Portfolios mance attri
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244 Managing Portfolios those inves
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246 Managing Portfolios vide a bigg
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248 Managing Portfolios If the firm
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250 Managing Portfolios REFERENCE J
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252 Managing Portfolios This invest
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254 Managing Portfolios FIGURE S-l
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256 Managing Portfolios manager‘s
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258 Managing Portfolios FIGURE S 4
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260 Managing Portfolios Imposition
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264 Managing Portfolios Recent stud
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High-Definition Style Rotation 267
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0 N
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272 Managing Portfolios TABLE 10-2
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274 Managing Portfolios ing pure re
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276 Managing Portfolios HIGH-DEFINI
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278 Managing Portfolios - FIGURE 10
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280 Managing Portfolios FIGURE 10-S
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282 Managing Portfolios REFERENCES
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284 Expanding Opportunities and “
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286 Expanding Opportunities such as
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290 ExpandingOpprtunities vided sho
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292 Expandingoppo~ties F I G U R E
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294 Expanding Opportunities F I G U
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2% ExpandingOpportunities FIGURE 11
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304 ExpandingOpportunities dinate l
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306 ExpandingOpportunities Also, ma
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308 Expanding Opportunities FIGURE
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310 Expanding oppo~ties -and- . 199
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312 ExpandingOpportunities applied
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314 Expanding Opportunities A secur
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316 ExpandingOpportunities in 1987,
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318 Expanding Opportunities the $4.
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320 Expanding Opportunities portfol
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322 Expanding Opportunities managem
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324 Expanding Opportunities The sec
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326 Expanding Opportunities Overall
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Page 403 and 404: 382 Name Index Clarke, Roger G., 25
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