130/30 in the 1930s
Apr 13th, 2008 | Filed under: 130/30Faced with a lack of track record for active extension funds, researchers are forced to re-create how these funds would have performed if they had existed for some time. The idea is to select an “alpha model” (an unfortunate term since alpha cannot technically be “modeled”) and run it back in time using real market data to see how it would have performed. The model is run once as a long-only portfolio and then again using any number of 1X0/X0 strategies. Comparing the performance of the models can yield some insight into whether the short extension itself adds value to a given alpha model.
The latest to conduct this analysis are Carl Armfelt and Daniel Somos, graduate students at the Stockholm School of Economics. Armfelt & Somos selected a set of basic Fama/French factors to create their alpha model and ran it all the way back to 1927. Here’s what they found:
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