“A disadvantage of short extension strategies is that they gain their market return and earn alpha from the same source”. What does this mean? Why can’t I short a stock in the tech sector and long a stock in the industrials sector? “Long short market neutral strategies allows you to generate alpha in one market and beta in another market”. What does this mean and why can’t short extension do this?
You can. Market return here means beta. The default assumption about short extension strategies is that they keep the beta unchanged, but that’s not always.
Long-short strategies keeps your market portfolio unchanged, but you can long-short stocks with the same beta in another market, making the transaction market neutral. It’s difficult, actually almost impossible, to match systematic risk from two different markets, this is why short-extensions don’t do this.
That is what I’d obtained: The short-extension strategy is a more efficient and coordinated portfolio of long and short positions. Long positions are only taken in under-valued (or at least neutral-value) stocks and short positions are in over-valued stocks. In contrast, a separate 100/0 plus 20/20 strategy would first invest 100% of capital in the market portfolio (and nothing short, hence the 100/0 designation). Then it would take 20% of capital in offsetting long and short positions in under- and over-valued stocks (the 20/20). There is inherent inefficiency in this approach as the 100% long market portion will involve buying some of the same over-valued stocks which are shorted in the 20% short position
This above point is taken to explain the advantage of short extension, but what is the above statement in bold trying to demonstrate, and how does it shows that short extension would be more efficient?