The Concentration Game

D.E. Shaw & Co.

Research

11 Pages

D.E. Shaw considers the impact of increased concentration on benchmark-relative equity portfolios, both in terms of overall risk and the potential to generate alpha.

 

Key Takeaways

Risk gets lopsided: Concentration makes portfolio outcomes hinge on a small set of correlated mega caps.
Alpha gets harder: Long only managers face tighter constraints on underweights, shrinking real breadth and transfer efficiency.
Reversion is steep: Returning to prior concentration levels may require very large relative gains from the rest of the index.
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