RT Journal Article
SR Electronic
T1 Understanding Sources of Risk and Opportunity in Short-Extension Strategies
JF Special Issues
FD Institutional Investor Journals
SP 119
OP 129
VO 2008
IS 1
A1 Tony Elavia
A1 Steve Landau
A1 Mona Patni
A1 Andrew Ver Planck
YR 2008
UL https://pm-research.com/content/2008/1/119.abstract
AB The quest for more alpha has led many investors to consider implementing short-extension strategies. Meanwhile, other investors may have avoided these strategies because they fear that shorting and leverage unnecessarily increase risk. The authors do not believe this is the case. Instead, they believe that as leverage increases in a short-extension mandate, investors can increase their exposure to the manager's alpha model. Importantly, however, while the amount of risk can be controlled in a short-extension strategy, the types and sources of risk are somewhat different from long-only strategies. This article helps define and put into proper context the four primary sources of risk that typically accompany short-extension strategies. This will provide a framework to help investors better evaluate the risk-reward tradeoffs presented by various long/short strategies (that is to say, 110/10, 120/20, 130/30, and so on). Finally, it explains why we think managers who follow a quantitative approach to picking stocks are better suited to implementing short-extension strategies than fundamental managers.