Short Portfolio Research Articles

Country selection of emerging equity markets: benefits from country attribute diversification

We propose a multivariate scoring model based on four classes of variables to predict future returns of 23 emerging equity markets. For the periods 1986–1995 and 1996–2003, our long–short portfolio (11 top/bottom ranked countries) posts a quarterly significant average raw return and a quarterly significant average market risk-adjusted return. The all-classes model dominates the one-class-models. Results from this strategy are robust regardless of whether we concentrate on the 6 top/bottom countries, reduce the emerging market universe to the largest countries, eliminate the most rewarding country during the period, use different scores, or account for realistic implementation costs.

A Long–Short Story

This article addresses the following key points: Long–short portfolios offer a pure test of a manager's stock-picking skill, but portfolio construction and implementation are vital to success. Alpha generation comes from the convergence of the long and short decisions. Trading costs are amplified in long–short portfolios and must be controlled. As the strategy spreads, more managers may be chasing less alpha.

Developing an Integrated Technology Management Process

OVERVIEW:The lack of a systematic approach to managing technology hampers many companies in their drive for improved organizational effectiveness. A company can have a well-established new product development process but still come up against problems if it attempts to develop technology and products simultaneously. One way of addressing such problems is to complement the ongoing activities of the firm with a technology management process, as was done recently at Glaxo Wellcome. One of the key benefits of the approach taken at Glaxo Wellcome was the appointment of a fulltime technical director as part of the New Product Supply Organisation and the adoption of a short, medium and long-term portfolio approach to technology projects.

An Examination of Average Returns, Dispersion of Average Returns, and Bid-Ask Quotes

This study supports the notion put forth by Jacobs and Levy [1996] that, balancing equal dollar amounts, long and short takes full advantage of the spread of returns. Long/short equity strategy generates positive returns in 11 out of 13 cases, while negative returns appear in either the long or the short strategy in 9 out of 12 cases. The long/short portfolios9 return using the trade price method is between 200-300 basis points higher than the portfolio using the bid-ask price method; the timing of the trade execution does not affect the average monthly portfolio returns significantly. The short portfolio is smaller in size, and its average quote spreads and average effective spreads are greater and show wider dispersion than those of the long portfolio.

Portfolio Construction and Risk Management: Long�Short Portfolios

Choosing a long–short equity fund manager who both manages risk and adds value to a portfolio in a sustainable fashion is a complicated task. From the different types of risks taken by managers, to managers' performance, to fund size, to fees—investors need to consider a variety of factors to find a fund that is appropriate for their goals.

Closed-End Equity Funds

Can discounts and premiums on closed-end equity funds be used to earn positive excess returns over a benchmark index? Research in the U.S. market has found that investors could have earned higher returns than a benchmark of U.S. stocks by purchasing shares of closed-end funds with discounts. This research examines an extensive sample of U.S. and U.K. listed closed-end funds September 4, 1998, through 1991, including transaction costs, an important element in evaluating portfolio performance that is absent from previous work. While long portfolios with deep discounts outperform a benchmark index, provided transaction costs are low, the surprise is that short portfolios with deep premiums outperform the benchmark and long portfolios, provided transaction costs are moderate to high.

Equity market neutral investing

Market neutral investing is a portfolio construction technique designed to remove the inefficiencies inherent in the traditional long-only approach. It involves holding equal-sized, well-diversified long and short portfolios in the same equity market. In removing the market risk and return, this structure creates an absolute return investment offering low or negative correlation with the main asset classes. Market risk and return can be restored via an index future without reintroducing the original inefficiencies. This increased investment efficiency may come at the cost of some increase in administrative complexity.

On Back‐Testing “Zero‐Investment” Strategies

Zero-investment strategies typically involve forming a long portfolio in one set of securities and a short portfolio in another, with the two identified by the use of some trading rule. When back-testing such strategies, the ex post difference in their abnormal returns represents an unbiased estimate of their economic profitability in perfect markets and thus serves as an indication of market efficiency. However, Regulation T's short-selling constraints are a potentially significant imperfection facing retail and institutional investors. After development of a procedure that recognizes these constraints in measuring returns, the impact of these constraints on economic profitability is analyzed. Copyright 2000 by University of Chicago Press.

Long–Short Portfolio Management: An Integrated Approach

Long–Short Portfolio Management: An Integrated Approach

Long-Short Portfolio Management

With the freedom to sell short, an investor can benefit from stocks with negative expected returns as well as from those with positive expected returns. The authors explain that the benefits of combining short positions with long positions in a portfolio context, however, depend critically on the way the portfolio is constructed. Only an integrated optimization that considers the expected returns, risks, and correlations of all securities simultaneously can maximize the investor9s ability to trade off risk and return for the best possible performance. This holds true whether or not the long–short portfolio is managed relative to an underlying asset class benchmark. Despite the incremental costs associated with shorting, the authors argue that a long–short portfolio, with its enhanced flexibility, can be expected to perform better than a long–only portfolio based on the same set of insights.

On the Optimality of Long–Short Strategies

We consider the optimality of portfolios not subject to short-selling constraints and derive conditions that a universe of securities must satisfy for an optimal active portfolio to be dollar neutral or beta neutral. We find that following the common practice of constraining long–short portfolios to have zero net holdings or zero betas is generally suboptimal. Only under specific unlikely conditions will such constrained portfolios optimize an investor's utility function. We also derive precise formulas for optimally equitizing an active long–short portfolio using exposure to a benchmark security. The relative sizes of the active and benchmark exposures depend on the investor's desired residual risk relative to the residual risk of a typical portfolio and on the expected risk-adjusted excess return of a minimum-variance active portfolio. We demonstrate that optimal portfolios demand the use of integrated optimizations.

Detecting Information from Directors' Trades: Signal Definition and Variable Size Effects

There have been three empirical studies examining the share price reaction following trades by directors of UK companies (King and Poell, 1988; Pope, Morris and Peel, 1990; and Gregory, Matatko, Tonks and Pukiss, 1994). All three of these UK studies used different definitions of ‘buy’ and ‘sell’ signals resulting from the transactions of directors and employ different controls to detect the presence of any ‘size effects’. We investigate whether the signal definition explains the different conclusions drawn by these earlier studies, and examine whether or not any observed abnormal returns are explicable by the small companies effect. We also investigate trading strategies based on holding a long portfolio of shares purchased or a short portfolio of shares sold by directors held until the end of the study period or until a ‘reserving event’ (e.g. a sale following a purchase by director[s] is observed).

20 Myths about Long–Short

Popular conceptions of long–short investing are distorted by a number of myths, many of which appear to result from viewing long–short from a conventional investment perspective. Long–short portfolios differ fundamentally from long-only portfolios in construction, in the measurement of their risk and return, and in their implementation costs. Furthermore, long–short portfolios allow greater flexibility in security selection, asset allocation, and overall plan structure.