SchweserNotes write: "Lastly, long-short investing may be off-limits to some investors. These investors, however, could create an alpha and beta separation approach exposure using equity futures. For example, suppose the investor wants a beta from large-cap US stocks and an alpha from European equities. The investor can take a long position in the S&P 500 index futures contract and invest with a European equity manager to generate the alpha. To become market neutral in the European equity market, the investor would then short a futures contract based on European equities.
My question is above it says that long short investing may be off limits to some investors and in the end it says investor would then short a futures contract. It looks contradicting to me or may be i am missing something here. Please help me out here. Thanks
I think they mean shorting stock is off limits, so some investors are unable to borrow stock to take a fshort position. for a short futures contract, you’re not borrowing anything.
Finance people are amongst the worst for being incredibly sloppy in the language they use. Unfortuntely, the sloppiness in language occasionally leads to sloppiness in thinking, and some really, really stupid conclusions.
But I digress.
One does not short futures contracts. (Nor for that matter, does one buy or sell futures contracts.) One enters into futures contracts, taking the short position.
That’s not remotely the same as short selling.
In a short sale, you sell something before you buy it. Some investors are prohibited from doing that, as mentioned above.
When you have entered into the short position in a futures contract, you haven’t sold anything. You have simply agreed to sell something in the future, on a specific date, at a specific price. When that date arrives, you sell that something, but you have to have bought it first. So it’s not remotely short selling.
Pure alpha is suited for markets which are inefficient in this case they assuming that the European markets are not efficient and hence alpha can be generated out there.
US markets on the other hand are efficient so alpha strategy will not generate the desired alpha returns and uneccesarily give higher cost while implementing these alpha startegy in US markets,
A beta strat in US will be cost efficient and Aplha in Eurpean markets will generate return in excess of the cost associated with these alpha strats. Both position aplha and beta will be leveraged and require only margin exposure
