CFA Text V4 P247~.248, 2nd last paragraph Why Short Extention Strategies gain their market return (Beta) and earn their Alpha from the same source ? Does this mean that A 130/30 Short Extention Strategy has 1.3 Beta + 1 Alpha and here the 1 Alpha = - 0.3 Beta ?
I think the short extension strategy refers to a selection strategy or model. You go long good stocks and short poor ones according to the same criteria ( just opposite ends of it) . e.g. low P/E are good buy picks at value times , so conversely high p/e/ must be short candidates. In any case you execute both long and short at the same time and with the same strategy. Hence alpha and beta are really derived from the one model and portfolio. In contrast equity long/short has or can have two separately managed pieces and you can mix and match the short side and the long side ( e.g use Futures or even some other market e.g. Int’l , for the short ). This gives you various options on earning the alpha and the beta separately
I think there is a pill that can help with your “short extension”.
janakisri, Can you explain what is the “Alpha Beta Separation” strategy ? Is it 2 Alpha + 1 Beta (2 Alpha from same one source and 1 Beta from another source) ?
Alpha is due to manager skill , i.e. superior selection skill or timing skill Beta comes from the market i.e. earn rewards due to taking systematic risk Beta can be earned by investing in passive indexed portfolios. Alpha can be earned by investing in equity long/short market-neutral strategies i.e. with beta close to zero , but positive alpha. This strategy of earning your alpha from one source and beta from another is called “portable alpha” .
alta168 Wrote: ------------------------------------------------------- > CFA Text V4 P247~.248, 2nd last paragraph > > Why Short Extention Strategies gain their market > return (Beta) and earn their Alpha from the same > source ? Does this mean that A 130/30 Short > Extention Strategy has 1.3 Beta + 1 Alpha and here > the 1 Alpha = - 0.3 Beta ? If a 130/30 Short Extention Strategy has 1.3 Beta + 1 Alpha and the 1 Alpha = - 0.3 Beta from the SAME SOURCE, then total exposure is 1 Beta which is same just as a long of 1 Beta, this seems to be meaningless. So, the key point is what does it mean by “from the SAME SOURCE”. Anyone else can advise ?
Mentally I think of it as coming from one Model or strategy, i.e. no possibility of mix-and-match
Short Extension is a strategy between the Long-only strategy and Long-short market neutral (+futures and/or swaps) strategy. It’s also called partial long-short strategy. It earns its alpha and beta from a single source because the portfolio manager is usually thinking in terms of a single portfolio. The book also compares it with 100+30/30 strategy, whose alpha/beta are usually from two sources. IMO, Short Extension is a strategy to extend the Long-only strategy by partially relaxing the long-only constraints, so the portfolio manager can make more efficient use of his information. Long-only Strategy has a single source, so does Short Extension strategy. Credit Suisse 130/30 is a live example. --Hope I won’t correct so many times on the exam day.
alta168 Wrote: ------------------------------------------------------- > CFA Text V4 P247~.248, 2nd last paragraph > > Why Short Extention Strategies gain their market > return (Beta) and earn their Alpha from the same > source ? Does this mean that A 130/30 Short > Extention Strategy has 1.3 Beta + 1 Alpha and here > the 1 Alpha = - 0.3 Beta ? From the same source because the 130/30 is just a single portfolio.