Concentration
Concentration refers to the number of stocks in a portfolio. Net concentration is the difference between the number of stocks on the long minus the short side, expressed either as a percentage of the total number of positions or in absolute.
Concentration has a direct impact on:
- Liquidity: Building and liquidating positions has a market impact
- Volatility: If the objective is to deliver low-volatility returns, concentration is the place to start. The higher the number of names, the lower the volatility.
- Performance: Big concentrated bets hit home runs. Small bets compound singles.
Concentration is often perceived as an attribute of an investment style and as such, does not receive the attention it deserves. It is a bit like garlic—a tasty seasoning not recommended on a first date, but also a cancer-fighting super-food and vampire repellent.
Some market participants believe the key to superior performance is hitting home runs...
