Chapter 16

Weighted Allocation Models

Weighted allocation brings character to cloning. Models based on weighted allocation attempt to draw benefit from the relative size of the stock picks held in source managers’ portfolios.

The process of assembling the models from a determined number of stock picks from a single manager or a group of managers based on selection criteria is similar to the equal allocation model described in chapter 15. The weighted model takes wing when it comes to allotting assets: Distribution is done based on a weightage associated with each pick. This weightage is derived from the percentage allocation in the source manager portfolios.

This chapter presents the evolution of five different weighted allocation model portfolios from the three shortlisted managers: Bill Ackman, Warren Buffett, and David Einhorn. The different types are:

  • Three single-manager weighted allocation models demonstrating the manager’s largest three positions individually.
  • A combined weighted allocation portfolio displaying the largest position of the three managers.
  • A combined weighted allocation portfolio based on the largest new position of the selected three managers.

Applying quarterly updates to get the portfolios to conform to the models involve significant trading activity. As with the equal allocation model, a buy/sell trade is necessary whenever the stock picks change. Things can get cranking if, in the weighted allocation model, the weightage of the new pick is different ...

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