Bridge over ocean
1 March 2006 Financial Analysts Journal Volume 62, Issue 2

Trimability and Fast Optimization of Long–Short Portfolios

  1. Bruce I. Jacobs
  2. Kenneth N. Levy
  3. Harry M. Markowitz

Optimization of long–short portfolios through the use of fast algorithms takes advantage of models of covariance to simplify the equations that determine optimality. Fast algorithms exist for widely applied factor and scenario analysis for long-only portfolios. To allow their use in factor and scenario analysis for long–short portfolios, the concept of "trimability" is introduced. The conclusion is that the same fast algorithms that were designed for long-only portfolios can be used, virtually unchanged, for long–short portfolio optimization—provided the portfolio is trimable, which usually holds in practice.

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