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

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Listed:
  • Marie Briere
  • Ariane Szafarz

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.

Suggested Citation

  • Marie Briere & Ariane Szafarz, 2017. "Factor Investing: The Rocky Road from Long-Only to Long-Short," Working Papers CEB 17-013, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/249918
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    References listed on IDEAS

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    3. Basak, Gopal & Jagannathan, Ravi & Sun, Guoqiang, 2002. "A direct test for the mean variance efficiency of a portfolio," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1195-1215, July.
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    1. repec:eee:finana:v:56:y:2018:i:c:p:181-192 is not listed on IDEAS
    2. repec:eee:finana:v:55:y:2018:i:c:p:23-34 is not listed on IDEAS
    3. Marie Briere & Ariane Szafarz, 2018. "Factors and Sectors in Asset Allocation: Stronger Together?," Working Papers CEB 18-016, ULB -- Universite Libre de Bruxelles.

    More about this item

    Keywords

    Investment; asset allocation; factor investing; long-only; long-short; 130-30;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G00 - Financial Economics - - General - - - General
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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