Neutralization of Alpha - AIM 53.3 - Grinold & Kahn Chapter 14

[Hardy Noman]

Hi David,

in the "Neutralization of Alpha - AIM 53.3 - Grinold & Kahn Chapter 14 "
Could you explain how us naturalization the process of removing Biases and undesirable bets from alpha.

1) Benchmark Neutralization - "adjusting the benchmark alpha to 0"
Que) here is it that we are adjusting the asset weights to make portfolio beta = 1.
how are we removing biases or bets here?

2) Cash neutral - "adjusting alphas so that the cash positions would not be active"
Que) How can we achieve this? is it through forwards or something, so that our cash base remains same put market expose is different?

thanks

 

[ShaktiRathore]

Hi Neutralization , biases are when weightings of assets and constituents are different than that of benchmark when we realign these weightings and constituents with benchmark then we say we removed these biases and bets. SO OUR PORTFOLIO IS BENCHMARK NEUTRALISED.
Cash neutral using short futures. This lowers beta of cash and convert from active to inactive position.

thanks

 

[Hardy Noman]

Thank you ShaktiRathore !

So is it just shifting from a active strategy to a passive one (Following the Index)?

Also, what is meant by SCALING and TRIMMING of Alpha?
How do they refine the alpha?

Appreciate your help!!

Hardy

 

[ShaktiRathore]

As per i understand,
Scaling of alpha means taking more active positions and bets on securities with different weightings and constituents then benchmark.
When you trim alpha means you are still making bets but now you are downsizing these bets and biases to narrow levels so that portfolio deviates less than before thus downsizing these deviation of portfolio from benchmark is trimming the alpha.
Refining alpha is adjusting these biases as per i think.
thanks