Quotient Short Extension
Return and Risk Targets
Quotient Short Extension is positioned to offer exposure to a traditional large cap or broad market benchmark with the addition of leverage of 30% NAV through selling short selected stocks. Quotient Short Extension seeks to outperform a large cap or broad market benchmark such as the S&P 500, Russell 1000, MSCI USA, or Russell 3000 over a full market cycle targeting an annualized excess return of 3% with a tracking error of 6%.
Quotient evaluates a large cap universe of 1800 stocks daily to seek investment opportunities. The firm's focus is on stock selection which is driven by Quotient's insights into the valuation of companies operating within an industry. The valuation models incorporate fundamental, technical, as well as value, growth, and momentum factors from multiple categories. Quotient looks at this information both in terms of relative comparisons between companies in the same industry and trends over time. Quotient builds a unique model for each industry based on the price drivers that are predictive in that industry. In total, there is a unique valuation model for each of the 56 industries that a the firm follows. The combination of these industry models is designed to produce high risk-adjusted returns.
Portfolio Construction and Risk Control
The important factors for the portfolio construction process include company valuations, risk model forecasts, risk budgeting allocations, and transaction cost estimates. These data are used in a portfolio construction process to arrive at the target positions. Risk Management is integral to our disciplined quantitative process. The majority of the active risk comes from individual stock selection, while industry risk and style risk account for a small portion and active market risk is close to zero. This results in a broadly diversified portfolio with no concentrated positions or bets.
The portfolio typically holds 200 stocks long and 50 stocks short with a holding period of 3 to 6 months. The development of Quotient Short Extension is complete and ready to be launched as soon as capital is received. Quotient has been running a paper portfolio since April 2006. The maximum over or underweight for a stock is typically 2% and the maximum deviation for the aggregate weight of an industry is 1.5% from the benchmark weight. The overall exposure of style factors is constrained to avoid any significant style or capitalization bets. The strategy is offered as a separate account.