When equitizing a long short position where does the cash come from to invest in the ETF or for the collateral for the futures contract?
Assuming the short and long positions have equal betas wont all proceeds from the short be invested in the long?
Or do we have to have higher beta on the long side to have cash reserves to fund the equitization?
Any clarification here would be much appreciated.
Here’s what I think happens and I’ll try to explain it in a hypothetical scenario.
A portfolio has $100million funds to invest. Proceeds from short positions finance the long positions while the original $100million is used for systematic exposures (via ETFs etc…)
Ok so additional funds are needed to fund the equitization and it is not implied in the strategy as such that it should be funded by the short?
Future contracts dont need upfront payments
Your holdings can be the collateral
for ETF, you can use your holdings as well
forget about cash. this is the era of papers and data entries.
if you started with $100 in capital, you’re go long $100 of ABC stock and then short $100 CBA stock your cash position is still $100
100 - 100 + 100 = $100
Same idea as a short sale against the box
if you have a zero cash position long-short strategy you can buy the futures contract without an upfront cashoutlay as Audacious stated.