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Beyond The Style Box: Unconstrained Returns Based Style Analysis

Mar 27, 2012 Marc Odo

One question we get at Zephyr is, “Is it possible for a manager to fall ‘outside the style box’? "Shouldn’t a high-momentum growth manager or a deep value manager fall beyond the corner indices?” The answer is yes, there is a way you can have managers plot outside the box.

When William Sharpe originally came up with the idea of returns-based style analysis, the idea was that the space was defined by the indices themselves. A manager couldn’t plot outside of the four corners. However, as we see in the example below, the high-momentum growth manager appears to have hit an invisible wall, preventing it from appearing as “growth-y” as it should be.


So there is a way to modify the analysis. What you’ll want to do is:
1. Right click on the style chart and go to the section called “Analysis Parameters For This Chart”
2. Across the top menu bar, select the middle tab called “Parameters”
3. Off to the right, go to section called “Constraints”. The default is “Long Only”. Switch it to “Max in Short” and type in “100” in the box
4. Click “OK”


By unconstraining the analysis, those managers who were bumping up against the wall are now displayed beyond the box. This is a more accurate representation of this momentum manager’s style.


Sometimes people are a bit thrown off by this. They’ll say, “Max in short? Are you suggesting this guy is shorting stocks?” That is the wrong interpretation; the manager is not shorting any holdings here. Keep in mind this is a returns-based analysis, not a holdings-based analysis. What we’re saying with this type of analysis is that this manager’s returns are so growth-y, it’s like they can be described as anti-value; 180-degrees from what value returns look like.

We hope this helps. If you have follow-up questions, give us a call.

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