Long-Short Extension Strategies
Long-short extension strategies allow portfolio managers to reduce implementation strategies associated with the long-only constraint. These strategies are often called 130-30 strategies after the commonly-used ratio of 130% long and 30% short positions used to generate a net 100% long exposure to a given market.
The long-short extension allows managers to increase alpha by selecting both the best-performing and worst-performing stocks. Further, such managers are not forced to buy or sell stocks due solely to capital constraints rather than their outlook for the company’s performance.
In the January/February 2008 Financial Analysts Journal, Clarke, de Silva, Sapra and Thorley develop a model to determine the optimal extension ratio. They find that the extension should be larger in relation to the manager’s active risk, with the number of securities in the benchmark, and with the correlation between benchmark securities. The extension should be smaller when shorting costs or security-specific risks are high.
For more information, see all articles on: Alternative Assets, Hedge Funds, Institutional Investing, Investing in Stocks, Portfolio Management, Risk Management See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
