130/30 strategies—also known as short-extension strategies—have been used by institutional investors for a number of years. Now, with CSM, investors have ETF access to the 130/30 investment approach.
ProShares Credit Suisse 130/30 (CSM) is the first ETF to provide access to a 130/30 strategy.
CSM is based on the first-ever 130/30 strategy index — the Credit Suisse 130/30 Index — designed by recognized experts in quantitative finance: MIT Professor Andrew W. Lo, PhD, and Pankaj N. Patel, CFA, of Credit Suisse.
A 130/30 seeks to outperform a benchmark index by taking advantage of both negative and positive expectations for stocks. The central feature of this strategy is the use of limited shorting and leverage. Shorting helps a 130/30 increase the potential benefit from stocks with negative expected alphas as a source of returns; with the proceeds from shorting, a 130/30 fund can establish additional overweight positions in stocks with positive expected returns. This 130/30 structure can generate more information-efficient portfolios—as well as incremental outperformance—compared to a long-only index benchmark.
The Credit Suisse 130/30 Index, introduced in 2007, replicates a 130/30 investment strategy for large-cap stocks. The index, rebalanced monthly, seeks to outperform its traditional, long-only large-cap benchmark, while maintaining risk characteristics similar to that benchmark.
Lo and Patel described the principles and investment process of this innovative index in their award-winning paper, published in the Winter 2008 issue of The Journal of Portfolio Management, "130/30: The New Long-Only."
The ProShares Credit Suisse 130/30 is a new type of ETF from ProShares: Alpha ProShares. Alpha ProShares aim to provide investors with access to advanced investment strategies—in the form of ETFs.
A measure of the amount of deviation that a portfolio shows over time, relative to its benchmark index. Tracking error quantifies the degree to which the portfolio differs from its index or benchmark, by measuring the standard deviation between the two values. If tracking error is measured historically, it is called 'ex post' tracking error. If a model is used to predict tracking error, it is called 'ex ante' tracking error. Ex post tracking error is useful for performance reporting; ex ante is generally used by portfolio managers as an input to a portfolio risk management process.
Leverage
In general, leverage refers to borrowing. In investments, leverage can refer to the use of borrowed funds to enhance the returns of an investment. In a more general sense, leverage can refer to the enhancement of returns through the use of a variety of financial instruments.
Efficient Portfolio
A portfolio that provides the greatest expected return for a given level of risk. An efficient portfolio is mathematically calculated and takes into account the expected return for each security and its standard deviation. An information-efficient portfolio can be understood as a portfolio that takes full advantage of the value-added information provided by a stock-ranking system in determining the portfolio's composition and weighting.
Alpha
A measure of an investment’s performance relative to its benchmark. Specifically, alpha measures risk-adjusted return – the return generated by a security, relative to the return you would expect based on its beta. An investment returning more than the return that would be expected based on its volatility is said to generate positive alpha; an investment returning less than its expected return is said to generate negative alpha.
Beta
A measure of an investment’s price variability, relative to the market in which that investment trades. Over time, an investment with a beta of 1.5 will move, on average, 1.5 times the movement of its market. Betas can change over time, and they can be different for different types of price and market movement. For instance, an investment can be described as having a greater downward than upward beta if the investment moves downward more strongly in a down market than it moves upward in an up market.
Short selling
In an investment portfolio, selling short is the act of selling securities not already owned, in the hope of profiting by buying them back at a lower price. Typically, short sellers borrow stocks from broker-dealers and immediately sell those borrowed shares in the open market, collecting the sale price from the buyer. In order to profit, the investor must buy the shares (to return them to the broker-dealer) on the open market at a lower price than the investor got by selling them.
Long-only portfolio constraint
A long-only portfolio is restricted by its investment charter to purchasing securities and selling securities it already owns. A long-only portfolio is prohibited from borrowing shares for the purpose of selling them (i.e., selling short).
