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

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  • 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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    Cited by:

    1. Yang Zhao & Charalampos Stasinakis & Georgios Sermpinis & Filipa Da Silva Fernandes, 2019. "Revisiting Fama–French factors' predictability with Bayesian modelling and copula‐based portfolio optimization," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(4), pages 1443-1463, October.
    2. Zaremba, Adam & Andreu, Laura, 2018. "Paper profits or real money? Trading costs and stock market anomalies in country ETFs," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 181-192.
    3. Fletcher, Jonathan, 2018. "An empirical examination of the diversification benefits of U.K. international equity closed-end funds," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 23-34.
    4. Fletcher, Jonathan, 2018. "Betas V characteristics: Do stock characteristics enhance the investment opportunity set in U.K. stock returns?," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 114-129.
    5. Marie Briere & Ariane Szafarz, 2018. "Factors and Sectors in Asset Allocation: Stronger Together?," Working Papers CEB 18-016, ULB -- Universite Libre de Bruxelles.

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    More about this item

    Keywords

    Investment; asset allocation; factor investing; long-only; long-short; 130-30;
    All these keywords.

    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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