I’m a little confused here, when it says a benefit of short extension portfolios is that you can short positions from the “long” part of your portfolio. Why would you want to be both short and long the same security in the portfolio? That doesn’t seem to make sense… Also, while we’re on the topic, why do we reintroduce systematic risk by equitizing a market neutral strategy? Is it just to tweak how much systematic risk we want to have?
nerdattax Wrote: ------------------------------------------------------- > I’m a little confused here, when it says a benefit > of short extension portfolios is that you can > short positions from the “long” part of your > portfolio. Why would you want to be both short > and long the same security in the portfolio? That > doesn’t seem to make sense… You would not be purchasing and shorting the same securities in your portfolio. With a “long only” strategy, if you believe a security is overpriced - lets use the example YHOO, the most you can do is not buy the security at all, which would reduce your exposure to that YHOO stock to $0. However, if you are using a short extension strategy, you could actually sell that security short instead of just having a $0 position, so you would be taking an active bet on the YHOO stock price falling. With the proceeds from that short sale, you could purchase GOOG stock, thereby bringing your net equity exposure back to 100%. You are never long and short the same SECURITY in the portfolio. In a standard short-extension strategy you are short say 20% of the stock universe you are investing in, and long 120%, for a net 100% exposure. > Also, while we’re on the topic, why do we > reintroduce systematic risk by equitizing a market > neutral strategy? Is it just to tweak how much > systematic risk we want to have? A market neutral strategy would be trying to produce alpha above the risk free rate. So you short sell one stock and buy long another with the proceeds from the short sale. So you might earn say 1% return net from both strategies. If you equitize this strategy and reintroduce systematic risk, you would get that 1% return plus whatever the market return is. So if you equitize it with S&P contracts, you earn 1% on the market neutral strategy, and the S&P earns 7% this year, you have a net gain of 8%. The point is that the two strategies are not mutually exclusive, you can equitize a market neutral strategy to get the benefit of your alpha creation on top of the market return.
I’m a little confused here, when it says a benefit of short extension portfolios is that you can short positions from the “long” part of your portfolio. Why would you want to be both short and long the same security in the portfolio? That doesn’t seem to make sense… You can be long for strategic reasons and short for tactical reasons (short term). Also, while we’re on the topic, why do we reintroduce systematic risk by equitizing a market neutral strategy? Is it just to tweak how much systematic risk we want to have? Yes, moreover Systematic risk has return associated with it. Portable alpha is getting excess return from one market and getting systematic risk / return from another market / benchmark.
I guess short extension is a mix of beta and alpha. Long gives beta and short gives alpha. It is NOT from the same portfolio BUT from the same universe. One can long A and short B if both are in the same index.