Sign up  |  Log in

Equity - equitize L/S, core satellite, completeness, alpha beta separation

anyone else struggling with these questions? I just can’t seem to remember these strategies. Any shortcuts or suggestions how to understand and remember these? Thank you!

Save 10% on Premium Packages when you order by October 18!

equitized long-short starts with a long-short strategy with a beta of zero (zero market exposure). let’s say you expect market to perform well in the short term but you don’t want to rebalance the portfolio due to costs, taxes, etc. so you do so by buying futures of the market index. effectively, you’re no longer market-neutral and your portfolio’s beta is now close to the market’s beta. however, your underlying portfolio is unchanged. another possibility is to use ETFs instead of futures as a proxy for market index investing. 

core satellite is starting with a passive index strategy as a core and then using the rest of the funds on active management strategies. this allow you to get all of active return and misfit return but you bear all of the active and misfit risks associated with it (although both can be minimized by allocating more weight to the passive index, so it’s all up to your confidence in active manager’s skills and your expectations of the market).

completeness is starting with an active manager’s strategy and then allocating funds in a way that would result in a portfolio with risk characteristics of an investor’s (not manager’s) benchmark when combined with the active manager. you’d still have active return and active risk from the manager but removes misfit return and also removes misfit risk (in practice, removing misfit risk completely may be unlikely due to transaction costs or depending on the benchmark’s properties). in a way, completeness fund is a reverse approach from core-satellite.

alpha beta separation is concerned about 2 different markets. let’s say you have a good active manager in country A, but you expect country A’s market index to underperform compared to country B for some time. you can invest some in the market index of country B (your beta exposure) and invest the rest in the manager in country A. now you just need to remove the beta exposure from country A and this can be done by shorting futures of country A’s index (resulting in a beta close to zero). therefore, your exposure to country A is limited to only the active management (alpha) of the manager and your exposure to country B is solely on the market (beta) and are separate. You get best of both worlds. this strategy is like equitizing long-short strategy but you equitize a long position in a different market.

Thank you! Your alpha/beta separation summary is especially useful.