As turbulent equity markets leave investors searching for ways to increase alpha while taking limited risk, 130/30 strategies (also known as Short Extension) are gaining momentum as core portfolio allocations.
Quantitative managers are particularly well-suited to implement Short Extension strategies because of their ability to screen thousands of stocks on a daily basis with systematic, research-driven models.
Short Extension: Capitalizing on Both Sides of the Market reviews the mechanics of Short Extension strategies as well as its potential benefits and risks. These strategies seek to deliver higher risk-adjusted returns by relaxing the long-only constraint on traditional equity portfolios.
By profiting from a manager’s positive and negative outlooks, Short Extension strategies can offer a cost-effective way to improve risk-adjusted performance.
The paper concludes that:
-Quantitative managers develop detailed opinions on many stocks, every day, giving them a depth of intelligence when it comes to shorting;
-A manager’s success rate can be increased by a disciplined process that seeks to provide consistent, incremental outperformance of a benchmark; and
-It is more difficult for a traditional long-only manager to meaningfully express a negative view on a given stock as the manager is limited by the constituent index weights. Only 3% of stocks in the S&P 500 have index weights of 1% or higher.
L.D.