Long-short factor portfolios are constructed on the assumption that the two legs are complementary drivers of factor premiums. In our research paper,1 we critically assess this notion by breaking down the Fama–French style portfolios – low risk, momentum, value, profitability and investments (the latter two are often referred to as quality) – into their long and short legs. Although we find that factor premiums originate in both, it is evident that most of the added value tends to come from the long positions.
Moreover, our research shows that the long legs of factors offer more diversification than the short ones, while the performance of the shorts is generally subsumed by the longs. This outcome is particularly driven by a high common risk in short positions. This can be ascribed to the relatively high correlations between the shorts legs of various factors as well as between the shorts and longs of individual factors. As a result, we observed that the Sharpe ratios have been highest for the long legs of factors and lowest for the short legs.
“
The Sharpe ratios have been highest for the long legs of factors and lowest for the short legs
These results are confirmed in a series of robustness checks. They hold across large and small caps, as in both cases, the long positions contribute the most to factor premiums. They are robust over time and across international equity markets, and cannot be attributed to differences in tail risk. Thus, the long legs are crucial for understanding factor premiums, while no essential information is lost by dropping the short legs. All in all, the shorts offer essentially the same exposure as the longs, but with lower rewards and more risks.
Therefore, factor premiums can be more efficiently harvested by dropping short positions and focusing only on the long ones. Our findings do not even account for the substantially higher implementation costs borne by short positions compared to long ones. Additionally, short selling faces the impact of liquidity and capacity limits, as well as other risks, like the potential of unlimited losses, ‘short squeeze’ scenarios, counterparty risk and reputational risk.
Finally, our research also challenges recent claims that the low risk and value factors are subsumed by the new Fama-French factors, as this hypothesis holds for the short positions of these factors but breaks down for the long ones. To this end, we establish that the long legs of both the low risk and value factors offer distinct premiums that cannot be explained by the longs of other factors.
探索量化價值
訂閱我們的電子報，獲取尖端的量化策略和見解。
Footnote
1 Blitz, D. C., Baltussen, G. and Van Vliet, P., 2020, “When equity factors drop their shorts”, Financial Analysts Journal.
免責聲明
本文由荷宝海外投资基金管理(上海)有限公司(“荷宝上海”)编制, 本文内容仅供参考, 并不构成荷宝上海对任何人的购买或出售任何产品的建议、专业意见、要约、招揽或邀请。本文不应被视为对购买或出售任何投资产品的推荐或采用任何投资策略的建议。本文中的任何内容不得被视为有关法律、税务或投资方面的咨询, 也不表示任何投资或策略适合您的个人情况, 或以其他方式构成对您个人的推荐。 本文中所包含的信息和/或分析系根据荷宝上海所认为的可信渠道而获得的信息准备而成。荷宝上海不就其准确性、正确性、实用性或完整性作出任何陈述, 也不对因使用本文中的信息和/或分析而造成的损失承担任何责任。荷宝上海或其他任何关联机构及其董事、高级管理人员、员工均不对任何人因其依据本文所含信息而造成的任何直接或间接的损失或损害或任何其他后果承担责任或义务。 本文包含一些有关于未来业务、目标、管理纪律或其他方面的前瞻性陈述与预测, 这些陈述含有假设、风险和不确定性, 且是建立在截止到本文编写之日已有的信息之上。基于此, 我们不能保证这些前瞻性情况都会发生, 实际情况可能会与本文中的陈述具有一定的差别。我们不能保证本文中的统计信息在任何特定条件下都是准确、适当和完整的, 亦不能保证这些统计信息以及据以得出这些信息的假设能够反映荷宝上海可能遇到的市场条件或未来表现。本文中的信息是基于当前的市场情况, 这很有可能因随后的市场事件或其他原因而发生变化, 本文内容可能因此未反映最新情况,荷宝上海不负责更新本文, 或对本文中不准确或遗漏之信息进行纠正。