Are 120/20 Strategies Attractive? Why? George Oberhofer Senior Practice Consultant A 120/20 strategy allows an otherwise-conventional equity manager to sell short individual stocks in aggregate up to 20 percent of portfolio value and invest the short sale proceeds in additional long share purchases. While shorting and partial leverage have an aura of speculative danger, their true effect when properly used is to improve the efficiency of active risk diversification. Moreover, the operational requirements and guideline provisions necessary to accommodate a 120/20 strategy are straightforward. Although the primary rationale for 120/20 mandates is more efficient diversification of active management risk, it is conceivable that a manager could use its leeway to take larger active bets than it could in a conventional long-only assignment. This may be desirable. However, as a general principle, investors generally will wish to manage the amount of active risk taken, regardless of the level of risk-taking they choose. As always, the primary means investors have to manage active manager risk is to know the investment philosophy, professionals, process, and portfolios of the managers they hire. The manager given a 120/20 mandate should have the sophistication to measure and manage risk, the operational ability to manage short positions effectively, and the inclination to make active bets of sufficient size to take advantage of the mandate. Quantitatively-oriented managers, with their focus on measurement of expected risks and returns, have naturally taken the lead in offering 120/20 products and variants. Request this Research A note about our research Our proprietary research is made available to our institutional clients, and many of these published papers are available to other institutional investors as well. If you are not a Russell client, but are an institutional investor, we welcome you to request this research piece. We only require your contact information on a short request form. For more information about our research, please contact Rob or Gerry:   West Coast   East Coast Rob Ciro Director 866-926-5934 Gerry Lillis Director 866-459-4128 Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. USIMSLRC1196			Related Information Request this Research   Contact Details West Coast contact Rob Ciro Director 866-926-5934 East Coast contact Gerry Lillis Director 866-459-4128 Printer friendly version of this page