Equity

? am I missing sth? L/S means no money out of pocket, provided if it’s true market neutral, (ie, same industry) since it’s all alpha, no beta, therefore investor might get it equalized. what ends up now is the equity portion. profit from l/s, gain from long/short and interest from short, all compared to equity portion, so that means equity portion is all invested. another way is the exposure to systematic risk factors. no need to match alphas to bench mark, combine with with v.5, equity portion should be invested

lemme clarify, it is stressed repeatedly that to make 2 things comparable, they have to have the same risk exposure, in v.3 the schwesser didn’t explicitly state how much should be invested for the equalized part, but I believe it is stated in pieces else where. assume l/s means no money out of pocket, and it is truly alpha only, and equalized with etf/index future, to make the index/etf a valid benchmark, the portfolio and benchmark have to have same exposure to risk factors (v.5, and v.3 for bond index). let’s say the only priced systematic factor is beta, then the portfolio must have same beta with index/etf, to achieve this, entire equity portion should be invested etf/post 100% margin on index future. one requirement of a good benchmark is to have same systematic risk exposure. of course it is possible the l/s is not truly beta free, equity portion should be invested in etf and cash accordingly to make the benchmark valid, ie, match beta. bottom line, since equalized l/s uses index/etf as bench mark, the portfolio beta must be matched with index/etf, or an alternative bench mark must be used

This might help If an investor wanted to equitize a market neutral long-short strategy with a S&P 500 futures contract, which of the following would be the correct amount of the notional principal of the S&P 500 futures contract? A) 250 times the value of one contract. B) The cash from the short sale. C) The value of the long position. Your answer: B was correct! If the investor wishes to add systematic risk to a market neutral strategy, the investor would take a long position in an equity futures contract with a notional principal equal to the cash from the short sa