PT  - JOURNAL ARTICLE
AU  - Martin L. Leibowitz
AU  - Anthony Bova
TI  - Active 130/30 Extensions and Diversified Asset Allocations
DP  - 2008 Jun 20
TA  - Special Issues
PG  - 25--47
VI  - 2008
IP  - 1
4099  - https://pm-research.com/content/2008/1/25.short
4100  - https://pm-research.com/content/2008/1/25.full
AB  - Virtually all asset allocations have risks that are dominated by a 90% or greater correlation with equities. This high correlation acts as an 800-pound equity gorilla lurking behind the multi-asset façade of even the most diversified allocations. Benchmark-centric equity strategies such as active 130/30 extensions aim to have tracking errors (TE) that are largely uncorrelated with equities. Within equity-dominated allocations, these uncorrelated TEs should have little impact on fund-level volatility risk. Positive alpha opportunities from these strategies can therefore be particularly valuable because they can significantly increase the fund's total return with only minor increases in the overall volatility or other forms of “beyond-model” risk. Moreover, because such strategies relate to the basic equity assets, they help minimize any “stress beta” effects from short-term correlation tightening.