Equity Portfolio Management
LOS. 24p - Enhanced Indexing
In a derivatives-based enhanced indexing strategy, the manager obtains an equity exposure through derivatives. A common method of doing so is to equitize cash. Here the manager holds a cash position and a long position in an equity futures contract. The manager can then attempt to generate an excess return by altering the duration of the cash position. If the yield curve is upward sloping, the manager invests longer-term, if she thinks the higher yield is worth it. If, on the other hand, the yield curve is flat, the manager invests in short-duration, fixed-income securities because there would be no reward for investing on the long end. In these derivative-based strategies, the value added (alpha) is coming from the non-equity portion of the portfolio and the equity exposure is coming through derivatives.
Q1: How to match the cash position and long position in an equity futures contract?
Q2: How to alter the duration of the cash position? Does’t cash position mean duration less than 1 year? Thanks.