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

Marie Briere and Ariane Szafarz

No 17-013, Working Papers CEB from ULB -- Universite Libre de Bruxelles

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 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 (search for similar items in EconPapers)
JEL-codes: D92 G00 G11 (search for similar items in EconPapers)
Pages: 30 p.
Date: 2017-04-13
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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