20 Myths about Enhanced Active 120/20 Strategies

Jacobs, Bruce I.; Levy, Kenneth N.

doi:10.1002/9781118267189.ch23

Cited by 1 publication

(1 citation statement)

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“…Our paper contributes to the debate on the efficiency gains associated with relaxing the long-only restriction on portfolio optimization (Brush, 1997;Jacobs and Levy, 2005;Jacobs et al 2007 and2005) in the specific context of factor investing (Eun et al, 2010;Ang, 2014). Legal restrictions and specific costs aside, long-short strategies are evidently superior to long-only ones because they capture investment opportunities that are otherwise inaccessible.…”

Section: Resultsmentioning

confidence: 94%

Factor Investing: The Rocky Road from Long Only to Long Short

Brière

Szafarz

2017

SSRN Journal

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This paper examines how restrictions on short positions affect the financial attractiveness of factor investing. To fill the gap between unconstrained longshort allocations and restricted long-only portfolios, we consider two in-between strategies. The first imposes that only the market can be shorted; the second is the so-called "130/30" or "active extension" trading strategy, which caps total short exposure at 30%. The takeaways from our research are twofold. First, short sales contribute significantly to the mean-variance performance of efficient factor-based portfolios. Second, the factor portfolios built originally by Fama and French (1992) with the purpose of developing asset pricing are impressively clear-sighted when it comes to portfolio management. Indeed, combining these portfolios generates mean-variance performances similar to those of optimized long-short portfolios, except for low levels of volatility.Keywords: Investment, asset allocation, factor investing, long-only, long-short, 130-30. 2 ABSTRACT This paper examines how restrictions on short positions affect the financial attractiveness of factor investing. To fill the gap between unconstrained long-short allocations and restricted longonly portfolios, we consider two in-between strategies. The first imposes that only the market can be shorted; the second is the so-called "130/30" or "active extension" trading strategy, which caps total short exposure at 30%. The takeaways from our research are twofold. First, short sales contribute significantly to the mean-variance performance of efficient factor-based portfolios.Second, the factor portfolios built originally by Fama and French (1992) with the purpose of developing asset pricing are impressively clear-sighted when it comes to portfolio management.Indeed, combining these portfolios generates mean-variance performances similar to those of optimized long-short portfolios, except for low levels of volatility.3

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