Question 3D. I dont understand why they select market neutral instead of long only strategy.
I select manager Carina - long only because:
i.maintain the beta exposure of the emerging market equity allocation: long only -> increase the beta exposure to the market equity via exposure to small cap -> offset the decrease in beta exposure by removing emerging market equity manager
ii.provide no additional beta exposure:
Long only a specific number of small cap equities, satisfying
No of small cap equities * Value * beta of small cap = No of emerging * beta of emerging cap * Value
To answer the question, the strategy of Octan is market neutral with equitizing. Octain would use long only derivatives to maintain exposure to EM and uses market neutral so that there’s no additional beta exposure.
One of the advantages of this strategy is that you get exposure from beta through equitizing (essentially a passive strategy), and the manager can focus on adding alpha to the market neutral strategy.
I am not sure if this is still relevant for the 2019 exam. If you have Konvexity mocks, Exam 1 AM 1Q has a similar question but more in depth.