Focus: Equity portfolio management, security selection, institutional fund management, bottom-up investment strategies, performance evaluation.
Assignment Questions 1. What do you think of Numeric as a firm? How are long-short products of Numeric different from its long-only products? Ans: The long-short products involved holding a portfolio of long positions in combination with a portfolio of short positions. For the long positions, Numeric would buy “good” stocks, and for the short positions, it would sell short “bad” stocks. The firm could exploit its ability to predict losers and winners, a so called “double alpha strategy”. In addition, by matching the broad market and other common exposures of the long and short positions, it could largely eliminate all except stock-specific risks. Certainly, the portfolio would bear the risk that the longs underperformed the shorts. Adv: • Unlike long-only strategies, long/short strategies allowed one to exploit negative and positive information, and to concentrate assets in market sectors where the insights were greatest. • It could have any sector weights, provided that the long and short sector exposures were matched. • Also could save costs, in that they allowed clients to obtain diversification separately and more economically through low-cost products such as stock index funds or stock-index futures. For long-only products, the investors can only exploit positive information and try to long the stocks at a relatively lower price. And the portfolio may be forced to mirror the sector exposures of the benchmark, and own stocks in a sector even if there were no particularly compelling purchases in that sector. It also tended to bundle diversification along with stock selection, offering the investor much higher alpha per dollar of assets invested.
2. How useful is Exhibit 3 in understanding the characteristics of the stocks included in the various