Hey all,
This whole equitizing long-short was bugging me. Now I know starting from market neutral position you also get market exposure (beta) by buying futures. So your profits are long alpha, short alpha, plus long beta.
In practice though I just cant figure how am I going to make profits out of this - the main rationale of this. What I mean is
Lets say i go long market (long futures) and market goes up 10%
well lets say my both long and short stocks will go up 10%
I made 10%.
If market goes down 10%, I lost 10%. The thing I dont get is that my long in market always goes against my short stock? Am I missing something.
Well if its the case why not just buy long futures then - if market goes up 10% return 10% vice-versa. Whats the point of being long and short.
I mean whats the scenario when I have short alpha + long alpha + long beta returns more than long beta in practice? Is that possible unless short stock has beta of -1? Or short stock has less beta than long, so that it does not increase in the same way.