Positional Portfolio Management

Abstract

Abstract We study positional portfolio management strategies in which the manager maximizes an expected utility function written on the cross-sectional rank (position) of the portfolio return. The objective function reflects the manager’s goal to be well-ranked among competitors. To implement positional allocation strategies, we specify a nonlinear unobservable factor model for the asset returns which disentangles the dynamics of the cross-sectional distribution and the dynamics of the ranks of the individual assets. Using a large dataset of stocks returns we find that positional strategies outperform standard momentum, reversal and mean-variance allocation strategies, as well as equally weighted portfolio for criteria based on position.