On page 238 of the cfa book, using futures instead of long/short to port alpha, the books says that one has to short futures on the manager of the japanese index and take a long position on the s and p. this sounds a bit counter intuitive. Wouldnt we want to be long the japanese managers alpha since it says that the manager is a capable one? Or am i assuming too much with the word “capable”
he wants S&P 500 exposure. So he would be long s&p 500 futures and would then short the Topix Index futures for the active return. and he is explicitly forbidden from investing long/short.
the short futures position would be considered a hedge and not explicity seen as a violation of the short constraint.
I get the part of wanting exposure to the s and p but why would we want to short someone who would earn a positive alpha? Also how would this be considered a hedge if they are in different markets?
I did not say that - it is the footnote 69 on the same page. “It would be seen as a hedge of sorts …”
To different (not correlated?) markets on one you get exposure to Market Beta (Long) and then you take a short position on something for active returns (alpha) … Since these two markets are not correlated, we can say Alpha & Beta separation… This is what CPK is trying to say here I guess!
I dont have these books, so if you post more of the question it would be helpful. However, if the question relates to having a Japanese mgr you think can add value, but wanting S&P beta…then you would long the S&P futures to capture that beta. You would short the Japan futures to eliminate Japanese beta, and then you would invest with the Japanese manager. Any performance by the manager would be alpha, as you have removed the beta by shorting the JPN futures. In the end your beta is S&P, your alpha is derived by the JPN mgr.
Again, may or may not be what is being asked as I dont have materials, but I recall something to this effect in the past. Portable Alpha.
This makes more sense. Thank you all for the replies.
This makes more sense. Thank you all for the replies.