Why does a short extension strategy have zero beta?

CFA Level III
#1

I don’t have my books with me, just my notes from the CFAI text…but there would be some beta since they have some broad market exposure. ??

#2

I think you may be confusing short extension with long-short (which may or may not be market neutral). Market neutral - you can offset the beta’s from the long and short portfolios (can also be dollar, sector neutral). Short extension strategies - not possible to have a zero beta - from my recollection we’re referring to the 130/30 strategies. The purpose of this is to add alpha on the short side due to inefficiencies - but if the manager is fully invested - it will always have a long-bias jenny.

#3

Yeah, short extension will most likely have a beta greater than Zero but the actual amount really depends on the Beta’s of your short

#4

In a market neutral the manager has zero market exposure, in short extension, they will end up with some net beta.

#5

My notes from the CFAI text: “Short extension strategies are zero beta and often viewed as alternative investments whereas long-short strategies are seen as a substitute for long only strategies”. I’ll double check the text when I get home. At least I’m not completely missing something.

#6

I think you missed a few things. Long-short is not a substitute for long-only. Two totally different strategies. A short extension strategy can be viewed as a substitute for a long-short strategy. An entity may have restrictions that prevent it from investing in alternatives (structural), lack the adequate capital to meet minimum subscription amounts for HF’s, lack the size to maintain a diversified portfolio of alternatives (

#7

Would appreciate a further clarification on this. An investor gives manager 100 to purchase stock A, the manager uses the proceeds to purchase stock A, then he/she sells short 30 of stock A to buy $30 of stock A??? What I am missing here? Or does the manager short a different security then invests the proceeds in Stock A? Thx

#8

I think he’d short B for 30 worth, and throw it into A. so long 130 A and short 30 B, which adds to 100. The short position on B and its beta, will reduc the total beta of the 130 exposure to A.

#9

agree ^

#10

sbmfj Wrote: ------------------------------------------------------- > I think he’d short B for 30 worth, and throw it > into A. so long 130 A and short 30 B, which adds > to 100. The short position on B and its beta, will > reduc the total beta of the 130 exposure to A. Thanks sbmfj. Simple concept but confused me. I didn’t think the book did a good job explaining it.