TY - JOUR T1 - Most Pension Plans Need More Enhanced Indexing JF - ETFs and Indexing SP - 65 LP - 71 VL - 2000 IS - 1 AU - Ronald N Kahn Y1 - 2000/09/21 UR - http://guides.pm-research.com/content/2000/1/65.abstract N2 - Pension plans should optimally allocate their active risk budget to strategies in proportion to their information ratios, where the information ratio is the ratio of active return to active risk, and the risk budget allocation is the capital allocation (i.e. percent of fund value) times the strategy active risk. Enhanced index strategies have lower risk than traditional active strategies, and higher information ratios because of the lesser impact of the long-only constraint. Hence enhanced index strategies should receive the largest capital allocations from most pension funds. A low allocation to enhanced indexing is consistent only with the unsubstantiated view that traditional active strategies have dramatically higher information ratios. Equitized long-short strategies can have high active risk and still receive significant optimal allocations because of their potentially high information ratios. Pension plans desiring high active risk should seriously consider equitized long-short strategies. ER -