Are Long-Short Equity Strategies Superior?

Abstract

Equity analysts and asset managers often focus on which stocks to buy rather than which stocks to sell. Consequently sells, or overvalued stocks, may be perceived as relatively less efficiently priced. A market-neutral long-short equity strategy may be able to leverage sell information more efficiently than a traditional long-only strategy. Claims of the superiority of a long-short investment strategy are often based, however, on misunderstandings of modern investment theory. Increases in active return associated with the strategy are typically accompanied by increases in active risk.Given the level of information in most institutional stock forecasts, the implied level of portfolio risk, additional costs and available alternatives, many long-term institutional investors may prefer traditional long-only strategies. Long-short investing may be most appropriate as a special-situation strategy.

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