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130/30 Investment Strategies – Is the Active Extension Value Adding?

Korhonen, Jussi Antti Olavi and Kunz, Daniel (2010)
Department of Business Administration
Abstract
Objectives: In this thesis we studied the performance of active extension portfolios constructed by using momentum/contrarian strategies. Fundamentally, the difference between the 130/30 and the long-only asset classes is the relaxation from the long-only constraint. The main implication of this study is to find out whether the 130/30 strategy is value adding, in comparison to other actively managed asset classes. We examined the consequences of the fund managers stock selecting skills. Theoretical Framework: The relaxation from the long-only constraint should in theory provide the portfolio manager with more possibilities to exploit the negative outlooks of stock performances. This should, according to the modern portfolio theory, lead to... (More)
Objectives: In this thesis we studied the performance of active extension portfolios constructed by using momentum/contrarian strategies. Fundamentally, the difference between the 130/30 and the long-only asset classes is the relaxation from the long-only constraint. The main implication of this study is to find out whether the 130/30 strategy is value adding, in comparison to other actively managed asset classes. We examined the consequences of the fund managers stock selecting skills. Theoretical Framework: The relaxation from the long-only constraint should in theory provide the portfolio manager with more possibilities to exploit the negative outlooks of stock performances. This should, according to the modern portfolio theory, lead to a more optimal portfolio composition.
Data and Methodology: The prudency of these strategies was measured using the “superior” performance measure, Omega ratio, as the main risk-adjusted performance measure. Furthermore, we measured the performance also using the Sharpe ratio and the reward-to-VaR. The empirical part applies data over the sample period of Jan 1991- Apr 2009, using the constituents of the German DAX index. Results and Findings: The 130/30 portfolios underperformed in relation to the equivalent long-only portfolios but outperformed the benchmark index DAX. The outperformance over the DAX is through a size bias. The risk-return characteristics are comparable to the ones of a long-only. The Omega measure is more flexible than the conventional measures due to the possibility of adjusting the threshold return level to the market environment. (Less)
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author
Korhonen, Jussi Antti Olavi and Kunz, Daniel
supervisor
organization
year
type
H2 - Master's Degree (Two Years)
subject
keywords
manager skill, momentum/contrarian, short selling, DAX, long-only, Omega ratio, 130/30, active extension, Management of enterprises, Företagsledning, management
language
Swedish
id
2169582
date added to LUP
2010-06-07 00:00:00
date last changed
2012-11-12 11:50:25
@misc{2169582,
  abstract     = {Objectives: In this thesis we studied the performance of active extension portfolios constructed by using momentum/contrarian strategies. Fundamentally, the difference between the 130/30 and the long-only asset classes is the relaxation from the long-only constraint. The main implication of this study is to find out whether the 130/30 strategy is value adding, in comparison to other actively managed asset classes. We examined the consequences of the fund managers stock selecting skills. Theoretical Framework: The relaxation from the long-only constraint should in theory provide the portfolio manager with more possibilities to exploit the negative outlooks of stock performances. This should, according to the modern portfolio theory, lead to a more optimal portfolio composition.
Data and Methodology: The prudency of these strategies was measured using the “superior” performance measure, Omega ratio, as the main risk-adjusted performance measure. Furthermore, we measured the performance also using the Sharpe ratio and the reward-to-VaR. The empirical part applies data over the sample period of Jan 1991- Apr 2009, using the constituents of the German DAX index. Results and Findings: The 130/30 portfolios underperformed in relation to the equivalent long-only portfolios but outperformed the benchmark index DAX. The outperformance over the DAX is through a size bias. The risk-return characteristics are comparable to the ones of a long-only. The Omega measure is more flexible than the conventional measures due to the possibility of adjusting the threshold return level to the market environment.},
  author       = {Korhonen, Jussi Antti Olavi and Kunz, Daniel},
  keyword      = {manager skill,momentum/contrarian,short selling,DAX,long-only,Omega ratio,130/30,active extension,Management of enterprises,Företagsledning,management},
  language     = {swe},
  note         = {Student Paper},
  title        = {130/30 Investment Strategies – Is the Active Extension Value Adding?},
  year         = {2010},
}