During the final months of 2007, Credit Suisse and S&P both launched what they called “130/30 indexes”.  CS didn’t say much about their methodology at the time, but S&P published the entire index construction approach online.  After reading that approach on November 20, we wrote the following:

“…here’s the thing we don’t quite get: why would you want to benchmark yourself to another active manager? There is no common risk factor underlying these funds that can serve as a benchmark. There is no 130/30 beta. In fact, all a 1X0/X0 program aims to accomplish is to lever pre-existing alpha for greater returns if alpha is already positive or greater losses if alpha is negative. As IPE reports, a speaker at a recent conference referred to 130/30 as just a prescriptive technique. How do you index a ‘prescriptive technique’?”

Clearly anticipating such a line of questions, the developer of the Credit Suisse index, AllAboutAlpha Hall-of-Famer Andrew Lo of MIT, addressed this question head-on in his December 11 paper on 130/30 indexation (”130/30: The New Long-Only”).  The paper has generated quite a bit of chatter recently (the subject of this Pensions & Investments story today and a column in the Economist this week.)

Say Lo and co-author Pankaj Patel:

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