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Equity Factors: To Short or Not to Short, That Is the Question

Florent Benaych-Georges, Jean-Philippe Bouchaud and Stefano Ciliberti
The Journal of Investing October 2021, 30 (6) 34-46; DOI: https://doi.org/10.3905/joi.2021.1.181
Florent Benaych-Georges
is a quantitative researcher at Capital Fund Management in Paris, France
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Jean-Philippe Bouchaud
is the founder and chairman of Capital Fund Management and a member of the French Academy of Sciences in Paris, France
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Stefano Ciliberti
is the quantitative R&D lead at Abu Dhabi Investment Authority in the United Arab Emirates
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Abstract

What is the best market-neutral implementation of classical equity factors? Should one use the specific predictability of the short leg to build a zero beta long–short portfolio, in spite of the specific costs associated to shorting, or is it preferable to ban the shorts and hedge the long leg with—say—an index future? The authors revisit this question by focusing on the relative predictability of the two legs, the issue of diversification, and various sources of costs. Their conclusion is that, using the same factors, a long–short implementation leads to superior risk-adjusted returns than its hedged long-only counterpart, at least when assets under management are not too large.

Key Findings

  • ▪ A toy model gives key insights on the long hedged investment versus long–short investment dilemma.

  • ▪ The authors provide an in-depth analysis and revisiting of “When Equity Factors Drop Their Shorts” by Blitz, Baltussen, and van Vliet (2020).

  • ▪ Realistic implementations of long hedged factor investing and long–short factor investing lead to different conclusions than those of Blitz, Baltussen, and van Vliet (2020).

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The Journal of Investing: 30 (6)
The Journal of Investing
Vol. 30, Issue 6
October 2021
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Equity Factors: To Short or Not to Short, That Is the Question
Florent Benaych-Georges, Jean-Philippe Bouchaud, Stefano Ciliberti
The Journal of Investing Sep 2021, 30 (6) 34-46; DOI: 10.3905/joi.2021.1.181

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Equity Factors: To Short or Not to Short, That Is the Question
Florent Benaych-Georges, Jean-Philippe Bouchaud, Stefano Ciliberti
The Journal of Investing Sep 2021, 30 (6) 34-46; DOI: 10.3905/joi.2021.1.181
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  • Article
    • Abstract
    • BUILDING INTUITION: INSIGHTS FROM A TOY MODEL
    • REVISITING “WHEN EQUITY FACTORS DROP THEIR SHORTS” (BLITZ, BALTUSSEN, AND VAN VLIET 2020)
    • A REALISTIC IMPLEMENTATION FRAMEWORK
    • EFFECT OF THE AUM LEVEL
    • CONCLUSIONS
    • ACKNOWLEDGMENTS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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