InvestorQ : Is reallocation ideally active or passively done?
Mary Joseph made post

Is reallocation ideally active or passively done?

Aditi Sharma answered.
3 years ago

A decision to re-allocate can be either passive or active. A passive re-allocation, at best, protects your capital and helps you to outperform the index. But great ideas and great investments are normally the outcome of active re-allocation. The way Stanley Druckenmiller bet 14% of capital on shorting the pound in 1992. The way Paul Tudor Jones bet a big whale on a market correction in 1987. Or the way John Paulson bet almost everything shorting subprime mortgages in 2007. Of course, these are 1 in a million trades and you can create a strategy based on that.

Some of these re-allocations have been mighty profitable. For example, David Tepper’s re-allocation of his fund into US banks in 2009 was a phenomenal calculated gamble. While the street believed that banks will be nationalized by the US government, he was the only voice to bet against it. Stock prices bottomed and quadrupled in less than a year. Tepper’s fund earned $7 billion from the trade and Tepper made a personal fortune of $4 billion. That is the power of timely re-allocation. Of course, active reallocation makes a lot of sense if you can bring that depth and rigor to the table.