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Bridge over ocean
1 May 1997 Financial Analysts Journal Volume 53, Issue 3

Comparisons and Combinations of Long and Long/Short Strategies

  1. John S. Brush

Market-neutral long/short strategies get their returns from alphas and short rebates; long strategies get their returns from alpha and the market. Differing return and risk sources complicate their comparison, partly because of the strong market-referenced focus of conventional performance analysis. Compelling theoretical advantages of active return per unit of active risk suggest that long/short strategies are better able to deliver excess return than are conventional institutional long strategies. Long/short strategies, even with tiny positive alphas, are seen to improve investors' efficient frontiers when added to a traditional T-bill/long portfolio mix, mostly because their risk sources are uncorrelated. Surprisingly, the improvement occurs even if long/short strategies are Sharpe-ratio inferior to long strategies. These results provide theoretical support for including long/short strategies in most investors' mix of assets.

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