ProShares Credit Suisse 130/30 (CSM)
130/30 strategies have been used by institutional investors for a number of years. With ProShares Credit Suisse 130/30 (CSM), investors have access to the 130/30 investment approach in an ETF format.
CSM was the first ETF to provide access to a 130/30 strategy. It is based on the first-ever 130/30 strategy index, the Credit Suisse 130/30 Index, designed by recognized experts in quantitative finance: MIT Professor Andrew W. Lo, PhD, and Pankaj N. Patel, CFA, of Credit Suisse.
The 130/30 approach
A 130/30 strategy seeks to outperform a benchmark index by taking advantage of both negative and positive expectations for stocks, using limited shorting and leverage. Shorting allows a 130/30 fund to generate returns from stocks with negative expected alphas, while the proceeds from shorting allows the fund to increase positions in stocks with positive expected alphas, creating another source of potential returns.
By broadening the portfolio's opportunity set of investment positions, a 130/30 strategy provides further diversification, resulting in more potential for risk-adjusted outperformance of long-only benchmark indexes.
The Credit Suisse 130/30 index
The Credit Suisse 130/30 Index replicates a 130/30 investment strategy in a disciplined, risk-controlled manner. The index renders the strategy transparent by using openly defined portfolio construction and optimization techniques. The index is dynamic in that it is rebalanced each month.
Where does CSM fit in a portfolio?
CSM may be used as a portion of an investor's large-cap core equity allocation. With the 130/30 structure, CSM offers the potential for greater portfolio efficiency, while at the same time providing similar risk characteristics to the large-cap equity market.
Tracking error
Tracking Error is the extent to which a portfolio's performance differs from the performance of the benchmark to which it is being compared. It is reported as a "standard deviation percentage" difference. This measure reports the difference between the return an investor received and the return on the benchmark the investor was trying to match or beat.
Leverage
Leverage refers to using borrowed funds to make an investment. Investors use leverage when they believe the return of an investment will exceed the cost of borrowed funds. Leverage can increase the potential for higher returns, but can also increase the risk of loss.
Efficient Portfolio
Efficient Portfolio is a portfolio that provides the greatest expected return for a given level of risk.
Alpha
Alpha is a risk-adjusted measure of the so-called "excess return" on an investment. It is a common measure of assessing an active manager's performance, as it is the return in excess of a benchmark index or "risk-free" investment.
Beta
Beta is a measure of an investment's price variability relative to the market in which that investment trades. That is, it measures the tendency of an investment's returns to respond to swings in the market. A beta of 1 indicates that the investment's price will move in tandem with the market. A beta of less than 1 means that the investment will be less volatile than the market. A beta of greater than 1 indicates that the investment's price will be more volatile than the market. For example, if a stock’s beta is 1.2, it's theoretically 20% more volatile than the market.
Short selling
Short selling or "shorting" involves selling an asset before it's bought. Typically, an investor borrows shares, immediately sells them, and later buys them back to return them to the lender. In order to profit, the investor must buy the shares (to return them to the broker-dealer) on the open market at a lower price than the investor got by selling them. If the price of the asset rises after it is "shorted" the investor loses money.
Long-only portfolio constraint
Long-only portfolio constraint restricts a portfolio to purchasing securities and selling securities already owned. A long-only portfolio is prohibited from borrowing shares for the purpose of selling them short.