Concept · Equity strategies
What is the transfer coefficient?
Direct answer The correlation between a manager's actual portfolio weights and the unconstrained weights a forecast would justify on its own. A long-only mandate cannot short the stocks it dislikes, so it transfers only part of its signal into positions; the original estimate for a typical long-only manager was about 0.6 to 0.8.
A stock-picking signal built without constraints wants to short its worst-ranked names as hard as it buys its best-ranked ones. A long-only portfolio can only underweight a disliked stock down to zero, so the bottom of the ranking never contributes what the model thinks it is worth; the fund captures a fraction of its own signal, not all of it.
This is the reason a long-only value tilt should be expected to earn less than the factor’s own full long-short return, before a single year of live results comes in. The value tilt read carries the long-only number, not the factor’s textbook one.
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