I am still confused with short extension strategy, I understand equitizing long short, anyone can raise a scenario for short extension? I mean why they would do that, not how they do that. I can see the reason for each step in equitizing long short, but not short extension.
If i recall correctly, the two ways you can do this is a 100% long and 20/20% Long short vs 120% long and 20% short. The first is essentially two strategies whereas the 2nd is basically one strategy still (ie the names are from the same universe). So a real life example is a pension giving out two mandates to two separate firms vs in the 2nd, you give it to one firm…ie a value fund that would go 120% value stocks and short 20% stocks they will never be able to buy.
A good way to think about this is that you can keep your beta unchanged, and add alpha by adding the short extension. The combination of the 20% short and additional 20% long will keep your beta unchanged if you desire while allowing you to capture additional alpha through the short position.