Demystifying the Addition of Short Positions to an Equity Portfolio

Abstract

The single biggest difference between active extension strategies (commonly known as 130/30 or 120/20) and traditional long-only investing is the introduction of short positions to the portfolio. Shorting equities has been a strategy used by investment managers since the 1940s but has generally not been a mainstream tactic. Therefore, for many investors shorting still carries an air of mystery and uncertainty. Adding short positions to a portfolio gives the investor greater exposure to the chosen manager's stock-picking ability, which may be desirable in many cases. However, there are factors unique to shorting that are likely to blame for much of the mystique surrounding the strategy. By understanding these factors, investors can demystify the use of shorting and expand their investment horizons.

TOPICS: Mutual funds/passive investing/indexing, portfolio construction, equity portfolio management