'‘Question: Enhanced indexed portfolio benchmarked to Index. Target alpha 1.5. and target Active risk : 2%. Client asks to double Alpha by doubling the active risk.’ How should PM respond? Answer: Though doubling the active risk will increase the Alpha, it will not double because: 1) Long only constraint increasingly limit the PM from taking full advantage of her investment insight. 2) Information ratio falls because smaller part of managers insight is translated into the portfolio.(keeping bredth constant) ‘’ Is enhanced indexing essentially a Long-only strategy? Can’t a PM short securities in enhanced indexing?
I believe it’s an long-only strategy.
Does long or short suffer more from decreased market liquidity?