Barr Rosenberg

Founder, BARRA.  Chairman, AXA Rosenberg Group

Bio (Pensions & Investments)
AXA Rosenberg Group
Relevant Postings (AllAboutAlpha.com)

There is obviously something in the water in California that has led to uncommonly large cerebral cortexes in some of its citizens.  This is partly evidenced by the flood of financial innovation coming from the Left Coast for over a generation – from Barr Rosenberg to Bill Sharpe, BGI/Wells Fargo, Analytic, and Wilshire.   Even Harry Markowitz loved the place so much, he recently conducted a presentation in Boston by satellite so he wouldn’t have to leave (see posting).

Today, we are pleased to bring you a guest posting from one of the homes of the large-brained Financialus Californius: Jia Ye of First Quadrant L.P.  In this summary of a yet-to be-published First Quadrant white paper, Ye warns us that not all managers can benefit from removing the so-called short constraint.  And what she has found may surprise you.

Do Short Extensions Benefit All Managers?

By Jia Ye, Director & Chief Investment Strategist, First Quadrant L.P., Special to AllAboutAlpha.com

Contrary to popular belief, the ability to take short positions in equity portfolios does not necessarily lead to superior performance for all managers.  When we take into account the positive skew in stocks returns, only managers who can maintain a stable correlation between forecast and realized returns (captured by the manager’s information coefficient or IC) can take full advantage of the efficiency gains from short extensions. In other words, the ability to short stocks will not necessarily help managers with an unstable IC.

As the volume of articles here at AllAboutAlpha.com clearly illustrates, there has been a lot written recently about short extension (1X0/X0) strategies.  But there is little mention, here and elsewhere, that studies of this topic are based on one or both of the following implicit assumptions:

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By: Edward Robinson, Bloomberg News
Published: January 5, 2007

This article provides an interesting follow-up to a Barron’s piece in October on BGI’s “Triumph of the Nerds” that also discussed the Genesis of BGI – a team that included William Sharpe, Eugene Fama, Fischer Black, Myron Scholes, & Barr Rosenberg.  Not since the movie “The Breakfast Club” have so many cast members gone on to achieve such celebrity.

Not surprisingly, BGI agrees the line between hedge funds and long-only investing is an artificial one. 

“Institutional investing is undergoing radical change, according to (Blake) Grossman (BGI CEO)…’We think this artificial divide between long-only and long/short is one that’s destined to become extinct over the next several years,’ Grossman says.”

BGI’s bifurcated alpha/beta approach (i.e. hedge funds/ETFs) has sent its stock skyward, prompting some analysts to speculate about where the firm will be an acquisition target. 

“BGI and Barclays Capital have helped make its British parent a potential hot property. On Dec. 11, Barclays rose to a then- record of 746.50 pence a share after Merrill Lynch & Co. analysts Brian Bedell, John-Paul Crutchley and Edward Najarian wrote to investors that Bank of America Corp. might be interested in buying the bank.”

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By: Justin Fox, Fortune Magazine
Published: June 16, 2003

This article is several years old, but provides some interesting historical context to the current paradigm shift in portfolio management.  From William Sharpe, to Barr Rosenberg’s “Barr’s Bionic Betas” (eventually renamed BARRA…where was that corporate branding firm when he really needed them?), to Ronald Kahn and the triple Ph.D.’s at Barclays, this makes for an interesting read.

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