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Constraints on investment weights: What mandate authors in concentrated equity markets such as South Africa need to know

Constraints on investment weights: What mandate authors in concentrated equity markets such as... This article demonstrates the importance of setting risk budgets and constraints mindful of the nature of the chosen benchmark and the investment environment. The asymmetrical inefficiency of the long-only constraint when applied to a concentrated investment environment such as the South African equities market is illustrated. We estimate the optimal distribution of investment weights in each security in the context of standard portfolio construction techniques and typical South African equity benchmarks and market conditions. These distributions provide guidance to mandate authors who are considering allowing limited shorting in their net long portfolios as to the amount of gearing that is likely to be required. These estimates also show authors of long-only mandates the circumstances and assets for which their restrictions are materially binding. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Investment Analysts Journal Taylor & Francis

Constraints on investment weights: What mandate authors in concentrated equity markets such as South Africa need to know

Raubenheimer, H
Investment Analysts Journal , Volume 40 (74): 13 – Jan 1, 2011
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Publisher
Taylor & Francis
Copyright
© 2011 Taylor and Francis Group, LLC
ISSN
2077-0227
eISSN
1029-3523
DOI
10.1080/10293523.2011.11082540
Publisher site
See Article on Publisher Site

Abstract

This article demonstrates the importance of setting risk budgets and constraints mindful of the nature of the chosen benchmark and the investment environment. The asymmetrical inefficiency of the long-only constraint when applied to a concentrated investment environment such as the South African equities market is illustrated. We estimate the optimal distribution of investment weights in each security in the context of standard portfolio construction techniques and typical South African equity benchmarks and market conditions. These distributions provide guidance to mandate authors who are considering allowing limited shorting in their net long portfolios as to the amount of gearing that is likely to be required. These estimates also show authors of long-only mandates the circumstances and assets for which their restrictions are materially binding.

Journal

Investment Analysts Journal – Taylor & Francis

Published: Jan 1, 2011

References

  • Toward more information-efficient portfolios
  • Long-short extensions: How much is enough?
  • Portfolio constraints and the fundamental law of active management
  • The fundamental law of active portfolio management with full covariance matrix
  • The information ratio
  • Alpha is volatility times IC times score
  • Enhanced active equity portfolios are trim equitized long-short portfolios
  • 130/30: The new long- only
  • Quantifying the benefits of relaxing the long-only constraint
  • Varying cross-sectional volatility in the South African equity market and the implications for the management of fund managers
  • Aspects of constrained long-short equity portfolios