can somoene tell me the difference between these two strategies please?
thanks
long only - manager makes active bets on those he believes are undervalued. For the ones he believes are overvalued - he does not hold them. So on the Long (undervalued) he can hold them to any bigger extent. On the ones he does not particularly care about - it will be zero weight. So tracking error will be HIGHER than the Stock based enhanced indexing strategy below.
Stock based enhanced indexing is also almost like the above. Main difference is that the resulting portfolio looks almost like the index the manager wishes to benchmark against - except for the areas where the manager makes active bets.
Long only - Opportunity sets are limited. He can use only his +ve insight about any stock. He is constraint again shorting the stock so can not capture alpha for stock which he feels may be overvalued. Since he is not allowed to go short also limits his ability to capture +ve insights. Partial relaxation of long-only is called short extension .
Stock Based enhanced indexing - Here manager can take more independent decisions relative to derivatives based enhanced indexing strategy. IR (information ratio) is greater than derivatives based enhanced indexing for a given information coefficient (IC).
Difference between the two: I guess, enhanced indexing try to enhance return in a risk controlled manner. Manager uses strategy to replicate the benchmark & generate return to make for the administrative , transaction cost. As CP mentioned, Stock based enhanced indexing will have a lower tracking error than long only.
thanks guys
this is how i understood it
long - make bets on under performing stocks. dont best on over performing
stock based - beta is index exposure and generate alpha by betting on under performing stock in index
I thought the only diff between the two is in a Stock Based enhanced indexing a manager can negatively weight stocks…not true?
I don’t think you can negatively weight, you just under or overweight. The huge difference like someone mentioned is that Long only simply doesn’t hold the security if they have no information about it while Stock Selection enhanced Index manager will hold the security at the index benchmark. It’s a way to control risk so the resulting portfolio looks like the benchmark except where the manager made active bets.
negative weight as in shorting a stock vs not holding the stock in a long-only approach.
Restating Ishi93’s post:
Long only Active - starting position is zero weight
Enhanced Index - starting position is benchmark weight
The clue is in the names – one is active the other is semi-active